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Local governments in China cook the books to inflate revenue

Staff Reporter

Some local governments in China have begun cutting expenditure on non-essential investments, while seeking new financial sources by using reserve funds and selling local government assets to ease financial pressure, Beijing-based Economic Information Daily reports.
Against the backdrop of the government loosening its grip on the property sector and in view of current economic stagnation, financial departments of some local governments are resorting to extreme measures such as cooking their books to inflate revenue.
Financial departments usually cook their books by purposefully altering financial accounts to show high revenue if they find that their revenue targets are set too high at the beginning of a year and cannot be achieved by year end.
They may provide funds to subsidize enterprises and then reimburse the money through tax payments by these enterprises, which amounts to falsifying financial information by inflating spending and revenue.
A financial official in a city in northern China told the newspaper that falsifying financial records is a long-standing practice and that it is getting worse. Last year, 15% of the city's recorded revenue was a result of these practices. In some county governments, up to 30% of their recorded revenue was generated this way.
According to the paper, more than 95% of 70 large and medium-sized cities in China reported a month-on-month decline in property prices in August. The decline in the housing market has posed a challenge to the country's economic growth.
A report by Standard & Poor's Ratings Services stated that property-related revenue was estimated to comprise about 20% of the total revenue of local governments in 2013. This included net income from land leases, stamp duty, value-added taxes, real estate taxes, and income and business taxes from property developers.
An analyst from the ratings agency said that to cope with the reduction in property-related revenue, local governments have adopted some measures, including reducing non-essential spending, increasing tax levies, using reserve funds and selling assets.
A direct measure adopted by many local governments to respond to the issue is to reduce financial spending.
Some local governments have begun using cumulative earnings and financial reserves and have sold off assets to help make up for their financial shortfalls.
All of these measures may work in the short term, but cannot resolve the root cause of the problem, said Xu Gao, chief economist at Everbright Securities.
Given that the rate of urbanization in China is about 50%, the demand for property is still strong. Therefore, the government should work to maintain healthy and steady development of the property market, otherwise, measures aimed at easing the financial pressure on local governments will not work, Xu added.

References:
Xu Gao 徐高