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China’s Surging Revenue Counters Local-Government Debt Risk

July 19 (Bloomberg) -- China’s tax revenue rose 29.6 percent to 5 trillion yuan ($773 billion) in the first half of the year, giving officials more room to maneuver as they grapple with swelling local-government debt.

The gain, reported by the Ministry of Finance on its website today, compared with a 32.4 percent increase in the first quarter from a year earlier.

“Stable” economic growth and rising company profits helped to bolster revenue, with inflation also playing a role, the ministry said. The fiscal strength that encouraged Standard & Poor’s to raise China’s debt rating in December may help the nation to absorb any fallout from banks’ loans going bad after stimulus spending that began in 2008.

“Strong tax revenue should strengthen the fiscal position,” said Chang Jian, an economist at Barclays Capital in Hong Kong who formerly worked for the Hong Kong Monetary Authority and the World Bank. “There should be little worry about tax and fiscal revenue growth as the economy keeps growing at 8 to 9 percent.”

The Shanghai Composite Index fell 0.9 percent as of 1:45 p.m. local time on concern banks’ fundraising will drain capital from existing shares and policy tightening measures may slow the economy. China Merchants Bank Co. earlier announced a plan for a rights offer.

Tax ‘Capabilities’

Gross domestic product increased a more-than-forecast 9.5 percent in the second quarter from a year earlier. The nation’s first audit of local government debt found liabilities of 10.7 trillion yuan at the end of last year after investment vehicles were used as channels for stimulus spending.

While a “sizable bailout” will be required, China’s “local debt problem does not have to trigger a banking crisis or a macro-economic slowdown,” Stephen Green, the Hong Kong-based head of Greater China research at Standard Chartered Plc., said in an e-mailed note, dated yesterday and received today. “The central government’s balance sheet and tax collection capabilities combined with strong nominal growth should mean this challenge can be met.”

Revenue from personal income tax rose 35 percent from a year earlier and money from resource taxes climbed 45 percent, according to the finance ministry, which also cited improvements in collection.

‘Most Exposed’

In the short-term, the Ministry of Finance should budget for infrastructure spending to provide liquidity for troubled projects and stabilize “the most exposed banks,” Green said. Other measures could include transferring “a large chunk” of the financing-vehicle loans to a major policy bank, he added.

“Critically, once the immediate challenge has been met, China needs to rebuild its fiscal and financial systems to ensure that the same mistakes are not repeated the next time an economic crisis hits.”

China’s financial strengths outweigh “sizable” contingent liabilities in the banking system that could materialize in any extended economic slowdown, ratings company S&P said last year, when it raised the nation’s debt rating to AA-, the fourth-highest level. The government holds a world-record $3.2 trillion of foreign-exchange reserves.

Today’s data “shows the government has the room to cut tax for both companies and individuals, especially small and medium-sized enterprises, as a way to boost employment and consumption,” Chang said.

China is adjusting income tax this year, raising the entry level to 3,500 yuan per month from 2,000 yuan, effective Sept. 1. In addition, a plan to expand the resources tax has been submitted to China’s cabinet, the State Council, the Shanghai Securities News reported yesterday, citing an official at the State Administration of Taxation.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at

To contact the editor responsible for this story: Paul Panckhurst at

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