By Ellen Zhang and Ryan Woo
BEIJING (Reuters) – Any measure, $1 trillion sounds huge. That’s how long China’s provinces’ budget deficits last, cutting their fiscal power to finance infrastructure spending and tax cuts, and increasing the dangers for the world’s second-largest economy in 2023.
The timing couldn’t be worse for policymakers in Beijing, as the economy teeters under the weight of global recession risks, rising commodity prices, emerging geopolitical tensions, and widespread COVID-19 home lockdowns, ruining the backdrop once in five. Ruling year Communist Party Congress that began Sunday.
Local governments have long been a driving bomb of Chinese growth, however, declining profits from sales of state-owned land following a continued debt crackdown on the sector has severely eroded its monetary strength, a scenario exacerbated this year due to China’s weak growth. the low source of income. income tax and crippling COVID restrictions.
Local governments will also have to pay down their debt in the coming months, heralding more currency difficulties and limiting their ability to meet Beijing’s demands for more spending. Many have already resorted to salary cuts, staff reductions, subsidy cuts and even disproportionate fines canopy budget shortfalls.
In the first 8 months, China’s 31 provincial-level regions reported a gap between overall government profits and spending totaling 6. 74 trillion yuan ($948 billion). This is the largest of the era since at least 2012, according to Reuters calculations of local government knowledge. over the past decade, with the populous provinces of Sichuan, Henan, Hunan and Guangdong suffering the largest deficits.
During the same period, land sales through the government, counted separately, fell 28. 5 percent year on year to 3. 37 trillion yuan, making it urgent to repair the financial health of indebted real estate companies.
“With expansion slowing this year, we expect regional and local government budget deficits to remain large, reflecting the housing slowdown and the lingering effects of the coronavirus impact,” said Jennifer A. Wong, an analyst at Moody’s, who expects 2022 economic expansion to continue. It will be reduced to 3. 5% from 8. 1% in 2021.
In the past, deficits were largely offset through central government movement bills and budget carried out from previous years, however, analysts say slowing economic expansion may limit such assistance this time around.
Policymakers will also be reluctant to fill the fiscal vacuum with large-scale stimulus, as a wave of global interest rate hikes to curb runaway inflation has sent U. S. bond yields soaring. The U. S. economy economy widens the yield gap between U. S. debt and the U. S. The U. S. and China.
DEBT STRESS
Treasury bond quotas may rise, so some of them can be transferred to local governments to ease their fiscal tensions, said Luo Zhiheng, lead macroeconomic analyst at Yuekai Securities.
However, they face a constraint on their already tight money flows as local government debts peak in 2023 for the period 2021-2025, Luo warned.
Combined with some maturing debt from Local Government Financing Vehicles (LGFVs), investment corporations building infrastructure projects, this year and next will be the most stressful for local governments, he said.
About 380 billion yuan of LGFV bonds onshore from economically weaker provinces will be paid off over the next 12 months, according to a Moody’s report in August.
Such fiscal constraints, along with weakening exports, doubts about an entry recovery and external uncertainties, as well as the war in Ukraine, will put further pressure on the economy’s policymakers in 2023, said Nie Wen, an economist at the Shanghai-based Hwabao Trust. .
Nie forecasts GDP expansion of 5. 5% next year, assuming little or no COVID-19-like disruption, higher than the broad consensus of 3. 2% for this year, but still below the pre-pandemic speed of 6. 0% in 2019.
‘HEAVY LOAD’
Underscoring the pressure on finances, Shandong, Shanxi, Henan, Zhejiang and Tianjin Municipality provinces said they had all lost budget in government agencies in recent months.
In addition, some local market regulators have even imposed excessively high fines on small businesses to increase their revenue.
According to Yicai Monetary Media, local government revenues from fines and confiscations increased by 10. 4 in January-July year-on-year.
Additional spending to involve COVID outbreaks has also affected government finances.
Fiscal pressures are cutting back on some households’ source of income, a wake-up call for entry, and broader growth.
“My annual source of income was reduced by 27 percent to about 80,000 yuan last year, due to the very heavy local tax burden,” a worker surnamed Gao of a government company in Chongqing told Reuters.
“Our leaders were very worried those days because they said that the existing budget allocation is completely sufficient. Since there is no way out, they had to ask for cash from the local government’s tax department.
($1 = 7. 1135 Chinese renminbi yuan)
(Reporting via Ellen Zhang and Ryan Woo; Editing via Shri Navaratnam)
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