China’s doubling down on its zero-tolerance stance on Covid-19 empties local government coffers, posing a new threat to the economy and bond investors.
Jilin Province, in the northeast of the country, warned of “increasing conflicts” between spending and income. The finances of nearly half of its 60 county and district-level governments are so tight that they are exposed to “operational risks”, the provincial finance department said in its budget execution report. first half published last month.
All 31 provincial regions of China – except Shanghai – registered a deficit in the first seven months of the year. Authorities have provided billions of yuan in tax breaks to support businesses amid the economic downturn, and covered the cost of Covid Zero policies, such as mass testing and restricting residents’ movement. Falling land sales are adding to the pressure by removing a key source of funding.
Pressure on local government finances is set to intensify as the Communist Party ramps up its Covid-fighting efforts ahead of the two-decade congress. Health officials this month announced a series of measures that will be in place until the end of October, including asking local governments to regularly test residents, regardless of infection level. Lockdowns are happening with increasing frequency, with Chengdu, the country’s sixth-largest city with 21 million people, being one of the newest.
The result is that municipal governments seek to cut spending where they can. According to local media, government employees in coastal regions have seen their income cut as bonuses and subsidies have been removed. Covid test providers are finding it increasingly difficult to get paid for their services, with some warnings about the growing risk of bad debts.
“If tax revenue cannot rebound in the second half of the year, spending needs to be cut because the budget deficit cannot be exceeded,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered. Plc. “Slower fiscal spending than in the first half of the year would certainly be a drag on the economy.”
Constraints on provincial spending could hamper efforts to revive an economy struggling amid Covid restrictions and weak property. Friday’s official data showed a slight improvement in the economy’s recovery, although it remains fragile and susceptible to lockdowns and housing market turbulence.
Goldman Sachs Group Inc. economists say a massive stimulus package after next month’s party convention is unlikely, and Beijing’s unconventional efforts to boost incentives this year could limit the scope of future support policies .
“This year’s unique fiscal policy pattern has strong implications for policymaking next year and could significantly affect public sector and corporate financing conditions in 2023,” the economists wrote, including Lisheng Wang, in a note released Monday.
The situation in Changtai District in Zhangzhou City, Fujian Province, highlights the challenges. The district spent 32 million yuan ($4.6 million) on Covid measures in the first half of 2022, 5.6 million yuan more than budgeted at the start of the year, official figures show. Revenue from the sale of land for commercial and residential development was nil during the same period. To reduce spending in other areas, the district stopped giving bonuses to public servants, the statement said.
A year-long slump in the real estate market is weighing on demand for real estate. Nationwide, revenue from land sales fell 29 percent from a year earlier to 3.4 trillion yuan in the first eight months, according to the Ministry of Finance.
Tax revenues are also squeezed. Provinces granted 2.2 trillion yuan in tax rebates this year through the end of August, a third more than expected for the year as a whole. They were also instructed to reduce taxes by another trillion yuan for the whole year.
While local authorities are able to raise funds through the sale of bonds, they have used most of this year’s quota, which is set by the central government. Provinces have sold a total of 4.25 trillion yuan of bonds this year, about 87 percent of the authorized annual amount. Of this amount, more than 80% are so-called special bonds, which are mainly used for infrastructure spending rather than general purposes.
To help lower-level governments in particular, Beijing increased payments to authorities by 18 percent to 9.8 trillion yuan, but about 93 percent of the funds had been allocated by the end of June, the ministry said.
This support is countered by the slowdown in the economy. The Covid stop-start approach suppresses domestic spending at the same time that external demand declines. The consensus from a Bloomberg survey is that the economy is expected to grow 3.5% this year, which would be the second weakest annual reading in more than four decades. Forecasters at Morgan Stanley and Barclays Plc are among those predicting even slower growth as risks mount at the end of the year.
The lower tier areas in particular are struggling. Gushan Township in Jiangyin City, Jiangsu Province had no revenue under the government-run fund budget in the first six months of the year, according to its implementation report. budget for the period.
“Pressure on preventing and resolving local government debt risks has further increased,” the Gushan government said in the report. Uncertainties over meeting this year’s revenue target are growing as tax breaks and Covid spending drive revenue down, he said.
Local authorities can turn to alternative measures to increase revenue, such as increasing fines. A vegetable seller in Yulin, Shaanxi province, was fined 66,000 yuan for selling substandard celery worth 20 yuan, state broadcaster Central China Television reported on Monday. Beginning of the month.
There are also fears that the financial strains will affect the ability of local government financing vehicles to service their debts. LGFVs are companies that build infrastructure on behalf of these governments and their borrowings are implicitly guaranteed by the authorities.
“LGFV problems will worsen as their government owners will not be able to mobilize as many resources to support the vehicles in servicing debt,” Laura Li, credit analyst at S&P Global, said in a note. dated September 5.
The central government’s support means the provinces will not run out of money, but they will have to tighten their belts, said Luo Zhiheng, chief economist at Yuekai Securities Co.
“The lower the level of government, the more serious the imbalance between income and expenditure becomes,” Luo said.