Pictured here is a large residential community in Nanjing, Jiangsu province, January 16, 2023.
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BEIJING — China’s highly indebted local governments need new ways to raise money under a central regime that has made it clear that reducing financial risk is a priority.
Direct local government debt will exceed 120% of revenue by 2022, according to S&P Global Ratings analysts.
“The nation’s counties and municipalities have relied heavily on extensive bond issuance to get them through a COVID-induced economic slowdown and collapsed land sales revenues,” the S&P analysts said in a report last month.
Data from the International Monetary Fund shows that China’s explicit local government debt nearly doubled in five years to the equivalent of $5.14 trillion – or 35.34 trillion yuan – last year. That does not include several other categories of related fast-growing debt, such as that of “local government financing vehicles” (LGFV) – which allowed regional authorities to tap bank loans for infrastructure projects.
China’s central government is paying attention.
In the Chinese government’s annual work report released this month, an entire section was devoted to preventing and defusing major risks — primarily in real estate and local government debt. “We must … prevent a build-up of new debt while we work to reduce existing ones,” the report on the situation of local governments said.
The topic didn’t get much attention in last year’s report, stressed Ting Lu, chief economist for China at Nomura.
“Coupled with the conservative growth target (of around 5%), at some point this year, this may indicate a possible shift in focus towards tackling financial risks and hidden debt of local governments, particularly in H2, after the economic recovery has largely stabilized,” Lu said.
Recent key speeches by Chinese President Xi Jinping have used similar language to call on officials to address systemic risks. New Prime Minister Li Qiang this month also listed policies for “preventing and defusing risks” as one of the government’s short-term priorities.
Xi also has emphasized tackling corruptiona problem that is common in China, also at the local level.
Covid, impact on real estate
In the past three years, Covid and the property crisis have cut local government revenues, although it is unclear to what extent.
A budget category called local government funds saw revenue from land sales fall 23.3% to 6.69 trillion yuan — a loss of about $288 billion. S&P and other analysts estimate that land sales account for about a quarter of total local government revenues.
In China, land is owned by the government and sold to companies for development – use agreements last for 70 years if it is a residential project.
Property-related income is likely to remain under pressure as home buyer sentiment has yet to fully recover, said Sherry Zhao, director of international public finance at Fitch Ratings.
She said local governments are likely to turn to three other channels to increase revenue:
Taxes — reduce the level of tax cuts announced during the pandemic Asset sales — mainly generate one-off revenues from the sale or lease of state assets Transfers — draw more money from the central government
According to the Ministry of Finance, China’s central government increased its transfers to local governments by as much as 17.1% in 2022 and plans to increase aid by another 3.6% this year with 10.06 trillion yuan in transfers .
“Local government transfers accounted for about 60% of the increase in the central government deficit,” S&P analysts said in a separate report last week.
The long-term trend is clear: Beijing wants to make the country less dependent on investment-driven growth.
They do not expect local governments to fall back on off-balance sheet debt. “Even in fiscally weak regions, governments are unlikely to resume the use of hidden debt financing, for example through local government financing vehicles (LGFVs),” said S&P.
“The long-term trend is clear: Beijing wants to make the country less dependent on investment-driven growth.”
But local governments still have bills and public services to pay for.
Historically, local governments accounted for more than 85% of spending, but only received about 60% of tax revenue. Rhodium Group said in 2021.
Looking for new sources of income
This is evident from lists of market access violations published in two reports over the past six months of China’s National Development and Reform Commission, which oversees economic planning.
The bicycle sharing industry exploded in China several years ago, attracting a tidal wave of companies from small players to giants such as alibababacked by Hello Bike and Mobike, acquired by the Chinese food delivery giant Meituan.
Limited regulations often meant rows of bicycles on sidewalks.
Now some local authorities are trying to limit industry players to a handful of bike-sharing quotas sold over a period of several years.
Of the cases handled by the central government, China’s economic planner NDRC said the city of Zhangjiajie sold a pair of five-year quotas for more than 45 million yuan ($6.6 million) — more than 10 times the starting price.
In most of the other cases mentioned, the total transaction amount was not stated.
Another bike sharing quota auction in May last year reportedly raised 189 million yuan in Shijiazhuang, capital of Hebei province near Beijing. The city only disclosed the starting bids for what it called “public funds,” which totaled 17.3 million yuan.
Reports from the economic planner did not address the Shijiazhuang case and the city did not respond to a request for comment.
While Hello Bike, backed by Alibaba, and local players won a bid, Meituan’s Mobike did not. according to a city release. The two companies did not respond to requests for comment.
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