Chinese local governments are finding new ways to raise funds despite debt problems

BEIJING — Indebted local governments in China need new ways to raise funds under a central regime that has made clear its priority is to reduce financial risk.

Direct local government debt topped 120% of revenue in 2022, analysts at S&P Global Ratings said, noting that’s more than Beijing has unofficially declared to be an acceptable level of debt.

“Provinces and municipalities across the country have relied heavily on increased bond issuance to weather a COVID-triggered economic downturn and collapsing revenue from land sales,” analysts said. S&P 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. This does not include several other categories of related, fast-growing debt such as “Local Government Finance Vehicles” (LGFVs) – which allowed regional authorities to use bank loans for infrastructure projects.

The Chinese 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, mainly in real estate and local government debt. “We should (…) prevent the accumulation of new debts while working to reduce existing ones,” the local government report said. situation.

The topic didn’t feature as heavily in last year’s report, said Ting Lu, chief China economist at Nomura.

“Coupled with the conservative growth target [of around 5%]this could signal a potential shift in focus towards tackling financial risks and hidden local government debt at some point this year, particularly in the second half of the year, after the economic recovery has largely stabilised,” Lu said. .

Recent key speeches by Chinese President Xi Jinping have used similar language in calling on officials to address systemic risks. New Prime Minister Li Qiang also this month named “risk prevention and de-escalation” policies as one of the government’s near-term priorities.

Xi has also focused on the fight against corruptiona prevalent problem in China, including at the local level.

Over the past three years, covid and the real estate crisis have reduced local government revenues, although the exact extent is unclear.

The official data provides an overview. The finance ministry said the country’s health spending rose nearly 18 percent last year to 2.25 trillion yuan, after barely increasing in 2021.

A budget category called local government fund 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 revenue.

In China, land is owned by the government and sold to companies for development – ​​use agreements last for 70 years if the project is residential.

Real estate-related revenues are likely to remain under pressure as homebuyer sentiment has yet to fully recover, said Sherry Zhao, international public finance director at Fitch Ratings.

She said local governments would likely turn to three other channels to increase revenue:

• Taxes — reduce the level of tax cuts announced during the pandemic
• Asset sales – primarily generate one-time revenue from the sale or lease of state-owned assets
• Transfers – drawing more from central government funds

China’s central government increased transfers to local governments by 17.1 percent in 2022 and plans to increase support by another 3.6 percent this year with 10.06 trillion yuan in transfers, according to the finance ministry.

“Transfers to local governments accounted for about 60% of the increase in the central government deficit,” S&P analysts said in a separate report last week.

They don’t expect local governments to fall back on off-balance sheet debt. “Even in fiscally weak regions, governments are unlikely to resume reliance on hidden debt financing, for example through local government finance vehicles (LGFVs),” S&P said.

“The long-term trend is clear: Beijing wants to relieve the country of a reliance on investment-led growth.”

But local governments still have utility bills and utilities to pay.

Historically, local governments were responsible for over 85% of expenditures but received only around 60% of tax revenues, Rhodium Group said in 2021.

This is according to lists of market access violations published in two reports during the last semester China’s National Development and Reform Commission, which oversees economic planning.

THE The bike-sharing industry has exploded in China several years ago, attracting a flood of companies ranging from small players to giants such as Ali Baba-backed by Hello Bike and Mobike, acquired by Chinese food delivery giant Meituan.

Limited regulation often meant crowded bike lanes on sidewalks.

Now, some communities are trying to restrict players in the sector to a handful of self-service bicycle quotas, sold for a multi-year period.

Among the cases handled by the central government, China’s NDRC economic planner said the city of Zhangjiajie sold a few five-year quotas for more than 45 million yuan ($6.6 million), more than 10 times the starting price.

Most of the other cases mentioned did not indicate the total amount of the transaction.

Another self-service bike quota auction in May last year reportedly raised 189 million yuan in Shijiazhuang, capital of Hebei Province near Beijing. The city only disclosed starting bids for what it called “public resources”, which amounted to 17.3 million yuan.

The economic planner’s reports did not include the Shijiazhuang case, and the city did not respond to a request for comment.

While Alibaba-backed Hello Bike and local players won a bid, Meituan’s Mobike did not, according to a statement from the city. The two companies did not respond to requests for comment.