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China’s fiscal profit in the first two months of 2023 shrank 1.3% from a year earlier, the finance ministry said. However, there were indications that economic activity should pick up again after strict COVID measures.

Statistics this week showed that the world’s second-largest economy gradually rose to better results. This happened because the government suddenly eased restrictions in December, but the recovery has been shaky. The central bank said it would halve the quantity of cash banks must hold as reserves to help spur growth.

Fiscal revenue totaled 4.57 trillion yuan from a year earlier in January-February, while spending reached 4.08 trillion yuan, up 7.2%.

Revenue generated from selling government land has declined even further in the first two months. This signified that real estate developers are still hesitating to make large investments despite the additional assistance the government has provided to make funding more accessible.

Revenue from the sale of land, the largest source of financing that local governments collect directly, fell by 29.2% in the first two months of the year.

Challenges and opportunities for China’s local governments and industries

The finance minister said earlier this month that fiscal conditions for China’s local governments could turn more positive as the economy slowly improves. However, debt risk for some governments is high as they face repayment pressures.

With a harsh and volatile external environment, external and domestic demand improvement faces certain constraints, said the Vice Minister for Industries during a recent meeting with major manufacturing provinces.

The work and functioning of the firms still need to improve. That points to a mess in tax revenues after small firms were hit particularly hard by anti-virus measures last year.

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