The Chinese economy, despite officially growing at around 5 percent, appears to be much weaker than advertised. This is evident in the government’s finances, as spending has increased by about 4 percent, while revenue has decreased by about 3 percent in the first half of 2024. This poses a significant problem for an economy that heavily relies on public investment and spending, especially considering the increasing debt constraints.
One key indicator of the weakening Chinese economy is the decline in tax revenue, which should closely correlate with nominal GDP growth. Despite the expectation of a 6-8 percent increase in nominal GDP from 2023, China’s tax revenue is declining. This is a cause for concern for Beijing.
To address this issue, the Chinese government has implemented a plan to combat the declining tax revenue. The tax authorities and law enforcement have significantly increased tax investigations targeting businesses and individuals nationwide. However, there has been no official announcement or new policy regarding this crackdown, leaving many confused about its purpose and objective.
The intensified tax investigations have raised major concerns throughout Chinese society. These investigations seem to reach back several years, and in some cases, even decades. What is even more alarming is that companies and individuals are being fined exorbitant amounts for minor infractions that occurred years ago, sometimes far exceeding the original offense.
There are two significant implications of this tax crackdown. Firstly, businesspeople and individuals with means are now more determined to shift their capital and families out of China. Despite the supposed inflow of enormous current account surpluses, the authorities are doing everything they can to prevent money from leaving the country. Document fraud in international transactions continues to facilitate the transfer of funds out of China, while wealthy Chinese individuals and their children continue to emigrate. A negative business climate further reinforces their decision to leave.
Secondly, a major crackdown aimed at recovering past taxes is not a sign of a robust economy or a public sector experiencing only a slight decline in revenue. In a strong economy, police and tax authorities would have more pressing matters to attend to than chasing after decade-old tax bills that are notoriously difficult to collect. This raises doubts about the accuracy of China’s tax revenue data and suggests that the economy may be in a much worse state than what official propaganda portrays.
It is possible that this crackdown is an extension of the ongoing corruption crackdown led by Xi Jinping, now encompassing private citizens. However, it is too early to determine the true motive behind these investigations. Nevertheless, if these tax investigations extend to a broader societal crackdown dating back decades, it would be even more troubling, potentially indicating political motives.
Beijing’s focus on cracking down on the private sector and driving them away while instilling control and fear within the general population raises concerns about its objectives. If the aim is to achieve greater control and suppress dissent, this tax crackdown serves as an effective tool.
In conclusion, the signs of a weaker Chinese economy are becoming increasingly apparent, despite official growth figures. The decline in tax revenue and the intensified tax investigations targeting businesses and individuals point to deeper issues within the economy. The government’s efforts to address the problem may have unintended consequences, such as driving wealth and talent out of the country. Furthermore, the crackdown raises questions about the accuracy of China’s official economic data and the potential political motivations behind these actions. The situation calls for careful observation and analysis to fully understand the implications for China’s economy and society.
