- Municipal direct debt exceeded 120% of revenue in 2022, analysts at S&P Global Ratings said, noting that this is more than Beijing has unofficially called acceptable debt.
- The government’s annual work report, released this month, devoted an entire section to preventing and mitigating major risks in property and municipal debt.
- Some local governments are trying other ways to generate additional income at the expense of fair market access for bike-sharing companies. This is the result of two reports by China’s National Development and Reform Commission over the past six months, which oversees economic planning.
Pictured here is a large residential community in Nanjing, city of Jiangsu province, Jan. 16, 2023.
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BEIJING — Debt-ridden local governments in China need new ways to raise money under a central regime that has made it clear that reducing financial risk is its priority.
Municipal direct debt exceeded 120% of revenue in 2022, analysts at S&P Global Ratings said, noting that this is more than Beijing has unofficially called acceptable debt.
“The country’s provinces and municipalities have relied heavily on expanding bond issuance to sustain them through a COVID-induced economic slowdown and slumping real estate revenue,” 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 over five years to the equivalent of $5.14 trillion — or 35.34 trillion yuan — last year. That doesn’t include several other categories of related, fast-growing debt, such as that of Local Government Financing Vehicles (LGFV) – which allowed regional authorities to draw on bank loans for infrastructure projects.
China’s central government is paying attention.
China’s annual government work report, released this month, devoted an entire section to preventing and mitigating major risks — mainly related to real estate and local government debt. “We should … prevent the build-up of new debt while working to reduce existing debt,” the report said of the local government situation. Situation.
The issue didn’t gain as much prominence 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 possible shift in focus to managing financial risks and hidden debt from local governments sometime this year, particularly in the second half after the economic recovery has broadly stabilized,” Lu said.
Similar language was used in recent key speeches by Chinese President Xi Jinping when he urged officials to address systemic risk. New premier Li Qiang this month also cited measures to “prevent and mitigate risk” as one of the government’s short-term priorities.
Xi has also stressed fighting corruption, a problem that is rampant in China — including at the local level.
Over the past three years, Covid and the housing slump have slashed local government revenues, although by what extent it is unclear.
Official data provide information. The Ministry of Finance said the country’s healthcare spending rose nearly 18% to 2.25 trillion yuan last year after barely growing in 2021.
A household 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 – lease agreements last 70 years if it is a residential project.
Real estate-related revenues are likely to remain under pressure as homebuyer 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 boost revenue:
- Taxes – reducing tax cuts announced during the pandemic
- Asset Sales – Generate mostly one-time income from the sale or lease of state-owned assets
- Transfers – take more central government funds
China’s central government increased remittances to local governments by a whopping 17.1% in 2022 and plans to increase support by another 3.6% this year with remittances totaling 10.06 trillion yuan, according to the Ministry of Finance.
“Remittances 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.
The long-term trend is clear: Beijing wants to relieve the country of its dependence on investment-driven growth.
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They don’t expect local governments to resort to off-balance sheet debt. “Even in fiscally weak regions, governments are unlikely to resume the use of hidden debt financing, such as through Local Government Financing Vehicles (LGFVs),” S&P said.
“The long-term trend is clear: Beijing wants to free the country from its dependence on investment-driven growth.”
But local governments still have to pay bills and public services.
Historically, local governments were responsible for more than 85% of spending but received only about 60% of tax revenue, the Rhodium Group said in 2021.
Some local governments are trying other ways to generate additional income at the expense of fair market access for bike-sharing companies.
That’s according to lists of market access violations released in two reports over the past six months by China’s National Development and Reform Commission, which oversees economic planning.
The bike-sharing industry exploded in China a few years ago, attracting a spate of companies ranging from small players to giants like Alibaba-backed Hello Bike and Mobike, which were acquired by Chinese grocer Meituan.
Limited regulation often meant swarms of bicycles crammed the sidewalks.
Now some local authorities are trying to limit industry players to a handful of bike share quotas that will be sold for a multi-year period.
Among the cases handled by the central government, China’s NDRC economic planner said Zhangjiajie City has sold some five-year contingents 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 listed.
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 announced the starting bids for the so-called “public resources,” which totaled 17.3 million yuan.
Reports from the economic planner 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 didn’t, according to a city publication. The two companies did not respond to requests for comment.