(Bloomberg) -- China appointed veteran official Lan Fo’an as the Communist Party chief at the Ministry of Finance, paving the way for him to become finance minister, which will give him responsibility over a plan to diffuse local government debt risks.
Lan’s appointment was announced at a meeting on Thursday, the finance ministry said in a statement. Liu Kun will step down from the post. Liu’s departure from the finance ministry was widely expected after he reached the retirement age for ministerial level officials.
The appointment comes at a crucial time for China’s fiscal system. China’s government finances have become more reliant on borrowing over the past decade due to regular tax cuts and a weakening property market. At the same time, Beijing is under pressure to increase spending on social welfare to meet the needs of an aging population and more sophisticated economy.
China has vowed an “active” fiscal policy to boost growth this year but that is proving difficult as local government income has fallen due to a years-long downturn in the property market and tax cuts. To give regions more room to spend, Beijing has started a 1 trillion yuan ($137 billion) program to allow them to swap high-interest “hidden” debt for lower-interest bonds.
The post of finance minister is less powerful in China than in other major economies. Lan is not a member of the Communist Party’s Politburo, the country’s most powerful political body.
As finance minister, Lan will likely play a role in deciding whether China should increase the official government deficit — currently set at 3% of gross domestic product — and the annual quota given to local governments to issue bonds for investment projects. The finance ministry has generally taken a conservative stance on government borrowing.
Lan, 61, is a native of the wealthy province of Guangdong in China’s south bordering Hong Kong, where he also spent most of his career as a government official, eventually appointed vice-governor of the province in 2016.
He started his career as a clerk at the finance ministry from 1985 to 1988, and went on to serve as Party chief of the Guangdong provincial audit office before serving in other provincial posts.
China’s President Xi Jinping has close family associations with Guangdong, his father having served as the top official there in the 1970s. Liu, the outgoing finance minister, also spent most of his government career in Guangdong.
Guangdong in January became the first province to announce that all its existing “hidden” debt has been removed, after it and other rich regions such as Shanghai and Beijing started pilot programs to clear such liabilities last year. Hidden debt mainly consists of borrowing by state-owned enterprises for development projects which is implicitly guaranteed by the government.
From March 2017 to April 2021, Lan served as a member of the top group of Communist officials overseeing the southern island province of Hainan, which has been used as a testbed for reforms to tax and housing policies. He also headed the party’s anti-graft body in the province.
He was made governor of the central province of Shanxi in 2021. There he tried to oversee the province’s difficult transition away from reliance on coal-production into new sectors like renewable energy and data storage.
Liu Kun’s tenure as finance minister began in 2018. Containing local government debt risks and boosting economic activity through tax cuts were some of the other issues Liu had to tackle.
During Liu’s tenure as the finance minister, transfer payments by the central government to lower-level governments — a key tool to help local authorities meet their basic spending needs — doubled from 2017 to 2022.
The government has also provided massively higher amount of tax relief to support an economy roiled first by the trade war with the US and then the Covid-19 pandemic. Some 6.83 trillion yuan of taxes and fees were cut from 2018 to 2021, and another 2.64 trillion yuan was announced for this year, according to Bloomberg calculations based on government figures. That’s nearly five times as much tax incentives offered under Liu’s predecessor in 2013-2017.
--With assistance from Fengjiao Mao and Fran Wang.
(Updates with details and context throughout)
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