Multiple A-share companies are voluntarily paying back taxes—what industry changes does this reflect?

Wang Weiqing, Industry Mentor for the Taxation Program at the School of Economics, Fudan University, points out that multiple listed companies have recently made tax payments to rectify past underpayments. This trend stems from several interrelated factors: the comprehensive upgrade of China’s tax administration system; the full rollout of the Golden Tax Phase IV project; the launch of the ‘Strengthening the Foundation’ initiative; and intensified external regulatory oversight. Golden Tax Phase IV enables real-time cross-verification of data across tax authorities, banks, industrial and commercial administrations, and customs—integrating and fully documenting corporate cash flows, invoice flows, logistics flows, and contract flows. As a result, the operational leeway previously afforded by information asymmetry has been drastically reduced. More importantly, this wave may only mark the beginning of a broader campaign. Alicia Garcia-Herrero, Chief Economist for Asia-Pacific at Natixis, notes that the GDP-race model is fading, and local governments are expected to act with greater prudence going forward. Thus, investors must now reinterpret listed companies’ reported profits: profits on the income statement do not necessarily equate to freely disposable cash; historical tax liabilities may also surface as hidden future burdens for enterprises. Moreover, what truly warrants concern in this round of back-tax payments is the potential for a cascading effect: profit decline → cash flow pressure → increased tax payments → diminished investment capacity. Third, amid economic sluggishness, local governments face mounting fiscal stress and shrinking tax bases—intensifying tax audits and enforcement has thus become one key avenue to shore up revenue. Behind this ‘back-tax wave’ lies an acute and growing anxiety over local government revenue. According to data released by China’s Ministry of Finance, from January to July 2026, national general public budget revenue totaled RMB 14.3696 trillion, up 5.8% year-on-year; of which national tax revenue amounted to RMB 11.8381 trillion, up 6.7% year-on-year. Yet beneath these seemingly positive growth figures lie structural concerns. Local fiscal pressures are especially pronounced. During the same period, local-level general public budget revenue stood at RMB 7.9839 trillion, rising only 3.3% year-on-year; while local government fund budget revenue reached RMB 154.47 billion, down 24.8% year-on-year. Combined local fiscal revenue totaled RMB 952.86 billion—a 2.6% decline year-on-year. The precipitous drop in land transfer income is the core driver: in the first half of 2026, nationwide state-owned land-use rights transfer revenue stood at RMB 97.78 billion, down 31.5% year-on-year—the steepest decline in ten years. Compared to the historical peak of RMB 344.36 billion in the first half of 2021, it has shrunk by over 70%. Local reliance on land finance has plummeted from a high of 84% in 2020 to just 14.2% in the first half of 2026. From January to July, corporate income tax revenue reached RMB 327.69 billion (up 7.2% y-o-y), and individual income tax revenue reached RMB 106.62 billion (up 14.9% y-o-y)—both significantly exceeding the average growth rate of overall tax revenue. This reflects not only rapid profit growth among high-tech firms and high-income individuals but also contributions from enhanced tax audits and enforcement, prompting both enterprises and individuals to settle outstanding tax obligations. Against the backdrop of weak domestic demand, national tax revenue has declined from its 2023 peak, and land transfer income—the once-reliable ‘cash cow’—is contracting at double-digit rates. Local tax authorities have therefore targeted well-capitalized listed companies and large enterprises, intensifying efforts to recover unpaid taxes and late-payment penalties. Whether local tax bureaus have similarly ramped up audits and collection efforts against individuals and small-to-medium enterprises remains unclear, as tax authorities do not publicly disclose such data—and media outlets rarely investigate or report on such topics, leaving this aspect largely unknown.

Chapter Three: Core Profitability — How Does Supply-Demand Imbalance Trigger Explosive Corporate Profits and Dual Valuation Expansion?

Type 2: Supply-Contraction-Driven (Traditional Cyclical Industry Reversal) Underlying Logic: Demand does not surge—and may even dip slightly—but outdated production capacity exits en masse (due to losses, environmental restrictions, or industry consolidation), resulting in deliberate or involuntary supply reduction and a re-balancing—or even shortage—in supply-demand dynamics. Even without demand growth, a sharp contraction in supply alone can ignite explosive profit growth. Key Indicator Signals: 1. Industry revenue remains broadly stable—no high growth; 2. Laggard capacity continues exiting; industry operating rates rise steadily; 3. Product prices bottom out and rebound; 4. Capital expenditure-to-revenue ratio sits at a historical low—firms hesitate to expand capacity. Case Example: In 2021, certain niche chemical products saw only modest downstream demand recovery. Yet after years of persistent losses, numerous SMEs shut down production facilities, sharply reducing effective supply. Consequently, product prices surged dramatically, and enterprise profits swung from losses to massive gains overnight. Note: In supply-contraction cycles, demand does not explode—hence sustainability tends to be weaker than in demand-driven booms, and valuation upside is more limited. Returns primarily stem from earnings growth, and the magnitude of dual expansion (earnings + valuation) is typically muted. Three: Comprehensive Breakdown—How Supply-Demand Imbalance Progressively Drives Dual Valuation Expansion Four-Stage Transmission Chain (applicable to retrospective analysis of any historical cycle): 1. Pre-Inflection Stage: Balanced or Oversupplied Market The industry performs poorly; firms earn thin—or even negative—profits; market sentiment is pessimistic; valuations are compressed to historic lows. Investors see no light ahead and largely avoid the sector. 2. Inflection Stage: Silent Emergence of Supply-Demand Gap (Entry Window—corresponding to early recovery phase) Marginal demand improvement occurs—or supply continues to exit. Prices and gross margins turn upward first; revenue may still lag. This is the stage of expectation arbitrage: astute capital anticipates future profits, triggering early valuation recovery—valuation moves first, earnings follow later. Many retail investors shy away here, deterred by unimpressive financial reports. 3. Boom Realization Stage: Concentrated Profit Explosion (Main Uptrend—High-Growth Prosperity Phase) The supply-demand gap widens further; volume and price rise together; net profit in financial statements consistently exceeds consensus expectations. Earnings surge markedly, and the market confirms the prosperity is sustainable—not a fleeting pulse—thus assigning higher valuations. With both earnings and valuation rising, the dual-expansion rally takes off in earnest—stock price gains far outpace net profit growth. 4. Late-Boom Stage: Supply Begins Catching Up (Peak Warning—Maturity & Peak Phase) Lucrative profits spur industry-wide aggressive capacity expansion; capital expenditures surge. Though new capacity hasn’t yet come online, the market already anticipates future oversupply. At this point—even if current financials remain stellar—valuations begin falling preemptively. Critical Insight: Stock price peaks often occur not at peak earnings, but at the moment market expectations shift toward imminent deterioration in supply-demand fundamentals. Many retail investors rush in at peak earnings—only to suffer a ‘double whammy’ (falling earnings + collapsing valuation) afterward. Counterexample: Supply-Demand Oversupply Leading to a ‘Davis Double-Squeeze’ When supply vastly exceeds demand, prices keep falling, gross margins shrink relentlessly, and profits erode rapidly. Meanwhile, the market lowers forward expectations, compressing valuations further. For instance, in the late functional-phone era, demand contracted while existing capacity remained idle—triggering brutal price wars and continuous profit erosion. Both earnings and valuation collapsed—a classic double-squeeze. Four: Practical Identification—How Ordinary Investors Can Simply Spot Ongoing Supply-Demand Imbalance

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