Analysis – A$1 trillion headache: China’s domestic fiscal deficit poses broader risks to growth

Analysis – A trillion headache: China’s domestic fiscal deficit poses broader risks to growth


Written by Elaine Zhang and Ryan Wu

BEIJING (Reuters) – By all accounts, a trillion dollars seems huge. That’s the scale of the budget shortfall facing Chinese provinces, reducing their fiscal power to fund infrastructure spending and tax cuts, and raising the stakes 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 the risks of a global recession, rising commodity costs, rising geopolitical tensions and widespread coronavirus lockdowns at home — spoiling the backdrop for one in five cases. – The annual conference of the ruling Communist Party, which started on Sunday.

Local governments have long been the preliminary pump for Chinese growth, but falling government land sales revenue in the wake of the sector’s ongoing debt crackdown has severely eroded their financial strength – a situation exacerbated this year by China’s weak growth and weak taxes. Income and handicapping restrictions for COVID.

Local governments must also make debt payments in the coming months, which portends more financial pain and limits their ability to meet Beijing’s demands for increased spending. Many of them have already resorted to cutting salaries, reducing staff numbers, reducing subsidies and even imposing disproportionately heavy fines to meet the budget shortfall.

In the first eight months, 31 provincial-level regions in China recorded a gap between public revenue and expenditure totaling 6.74 trillion yuan ($948 billion). Reuters calculations of local government data in the past decade showed that this is the widest in the period since at least 2012, with the most populous provinces of Sichuan, Henan, Hunan and Guangdong suffering the biggest shortages.

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In the same period, government land sales, calculated separately, fell 28.5% year on year to 3.37 trillion yuan, adding to the urgent need to restore the financial position of debtor real estate companies.

Jennifer A. said: Economic growth slows in 2022 to 3.5% from 8.1% in 2021.

In the past, shortfalls have been largely offset by shifting payments from the central government and carry-over funds from previous years, but analysts say slowing economic growth may limit any such help this time around.

Policy makers will also be wary of capturing a financial slump with broad-based monetary stimulus as a wave of global interest rate hikes to rein in severe inflation has pushed up US bond yields, widening the yield gap between US and Chinese debt.

debt stress

Luo Zhiheng, chief macroeconomic analyst at Yukai Securities, said that the quotas of Treasury bonds could be increased, so that some of them could be transferred to local governments to ease their financial pressure.

However, they are facing pressure on their already tight cash flows as local government debt maturing in 2023 for the period from 2021 to 2025, Lu warned.

Combined with some debt to local government finance vehicles (LGFVs) — the investment firms that build infrastructure projects — this year and next will be even more stressful for local governments, he said.

About 380 billion yuan of internal LGFV bonds from economically weaker provinces are due to be repaid in the next 12 months, according to a Moody’s report in August.

Such fiscal constraints, along with weak exports, uncertainties about consumption recovery and external uncertainties including the Ukraine war, said Ni Wen, an economist at the Shanghai-based Hwabao Trust, will increase pressure on policymakers to support the economy in 2023.

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NEI forecasts 5.5% GDP growth next year, assuming little or no disruptions in the coronavirus, better than the broad consensus of 3.2% for this year, but still lagging behind the pre-pandemic pace of 6.0% in 2019. .


Highlighting the pressure on finances, the provinces of Shandong, Shanxi, Henan and Zhejiang as well as the Tianjin municipality said they had all allocated budgetary accounts to government agencies in recent months.

Moreover, some grass-roots market regulators have imposed very heavy fines on small businesses to increase revenue.

According to financial media Yicai, local government revenue from fines and forfeitures jumped 10.4% from January to July year on year.

Additional spending to contain the coronavirus outbreak has also strained local government finances.

Fiscal pressures are slashing the incomes of some families, a warning sign for broader consumption and growth.

“The annual income fell by 27% to about 80,000 yuan last year due to the very heavy domestic financial burden,” an employee surnamed Zhao at a government agency in Chongqing told Reuters.

“Our leaders were very concerned these days because they said that the current financial allocation is totally insufficient. Since there is no way out, they have had to request money from the local government’s Public Finance Department.”

(dollar = 7.1135 renminbi)

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