Beijing issued stern words on Monday to curb excessive fees and fines levied by cash-strapped local authorities, stating overzealous charges would weaken business confidence and undermine efforts to bring the economy back on track.

In a directive posted on its website, the State Council, China’s cabinet, said the matter would affect trust in government, vowed to make the collection of fees “scientific and standardised” and pledged it would prevent abuses of power that deteriorate the business environment.

“[We’ll] resolutely prevent unreasonable growth in fine revenue and rigorously address issues of falsified or improperly managed proceeds,” it said.

[Fines] must align with the legislative purposes of administrative penalty laws and relevant legal norms

State Council directive

“Meanwhile, we’ll prevent practices such as using fines to boost revenue, managing fines as a substitute for governance and profiteering through fines, and strictly regulate implementation.”

The cabinet said that enforcement standards should be strictly obeyed, while penalties must be based on legal provisions and the facts of the violation.

“It must align with the legislative purposes of administrative penalty laws and relevant legal norms,” it said.

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The edict came as local authorities struggle with falling tax revenue and shrinking income from land sales. Local government debt amounted to 40.7 trillion yuan (US$5.7 trillion) by the end of last year – the result of a construction frenzy funded by financing vehicles, state-owned enterprises and banks starting in 2008.

Fines and administrative fees imposed by governments at different levels totalled 850 billion yuan in 2022, making up 4.2 per cent of China’s total fiscal revenue according to the central government’s fiscal budget report.

Luo Zhiheng, an economist with Yuekai Securities, said local authorities have been motivated to accrue more revenue through fines, with collections growing 25.9 per cent between 2020 and 2022.


Anger mounts as China’s property debt crisis leaves flats unfinished

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The southwestern region of Guangxi, for instance, saw its revenues from fines account for 7.7 per cent of its 2022 budget revenue.

Although their proportions may appear small compared to tax revenue, Luo wrote in a note on Monday, “[China] must prevent fast-rising fines from affecting the business environment and undermining tax cut policies.”

Unreasonable fines were frequently reported during the years of the Covid pandemic, when financially strained local governments sought to bring in much-needed revenue.

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In 2021, some 67.18 million yuan in indiscriminate charges were levied on 2,547 businesses in Bazhou, Hebei province over the course of two months. A year later, a grocer in Yulin of Shaanxi province was fined 66,000 yuan (US$9,172) by local authorities for selling 2.5kg of substandard celery for 20 yuan.

Incentives to impose fines have not abated since, as the property sector has suffered a prolonged slump. Consequently, land sale revenue, which usually accounts for more than a third of local government funds, fell by 13.2 per cent last year.

Beijing has asked both central and local government agencies to tighten their belts by prioritising the use of funds on supporting people’s livelihoods, pensions and construction projects.
Transfer payments from Beijing have already increased to make up for the shortfall, as the central government’s debt burden is much lower.

Authorities are expected to increase the fiscal deficit ratio and raise local bond quota at the full session of the National People’s Congress next month, when lawmakers convene to review and approve the government work report.