According to S&P Global Ratings experts, local governments’ direct debt will surpass 120% of revenues in 2022, which is higher than the formal debt ceiling Beijing has set.
An entire part of the yearly government work report, which was published this month, was devoted to avoiding and neutralizing significant threats in real estate and municipal government debt.
Several municipal governments are experimenting with other revenue-generating strategies, but at the expense of equitable market access for bike-sharing companies. Two studies issued by China’s National Development and Reform Commission, which is in charge of overseeing economic planning, indicate as much.
Under a central government that has made it plain that reducing financial dangers is its top goal, China’s debt-ridden municipal administrations need novel methods to generate money.
The country’s provinces and municipalities have heavily relied on expanded bond issuance to carry them through a COVID-triggered economic slowdown and collapsed land-sale revenues, the S&P analysts said in a report last month. “The country’s provinces and municipalities have relied heavily on expanded bond issuance to carry them through a COVID-triggered economic slowdown and collapsed land-sale revenues,” the S&P analysts said.
According to statistics from the International Monetary Fund, China’s stated local government debt almost doubled over five years to $5.14 trillion (or 35.34 trillion yuan) last year. This excludes a number of other closely linked and quickly expanding debt categories, such as “local government financing vehicles” (LGFV), which enabled local governments to access bank funds for building initiatives.
The central authority of China is taking note.
An entire portion of China’s yearly government work report, which was published this month, was devoted to averting and defusing significant threats, particularly those related to real estate and local government debt. “We ought to… avoid the accumulation of new obligations while trying to pay down current ones,” the study stated regarding the position of municipal administrations.
Ting Lu, senior China economist at Nomura, emphasized that the subject wasn’t given as much attention in the report from the previous year.
At some point this year, especially in H2, after the economic rebound has generally stabilized, Lu said, “this may signal a potential shift in focus to tackling financial risks and hidden debt from local governments.” The cautious growth goal [of around 5%] is coupled with this, Lu said.
Similar wording has been used by Chinese President Xi Jinping in recent important addresses to urge officials to handle structural threats. This month, the government’s new premier, Li Qiang, listed policies for “preventing and defusing risks” as one of its top objectives.
In addition, Xi has placed a strong emphasis on combating graft, a problem that has long plagued China, even at the municipal level.
Impact of Covid and real estate
Although it’s uncertain precisely how much, Covid and the real estate downturn have decreased municipal government income over the last three years.
Some information is provided by official statistics. After scarcely increasing in 2021, the Ministry of Finance reported that the nation’s health expenditure increased by almost 18% last year to 2.25 trillion yuan.
Land sales income fell by 23.3% to 6.69 trillion yuan in the local government finances budget area, a loss of about $288 billion. According to S&P and other experts, about 25% of municipal governments’ overall income comes from property transactions.
Land in China is held by the government and leased to businesses for development; if it is a private endeavor, utilization arrangements are for 70 years.
Since purchaser confidence hasn’t completely recovered, property-related income will probably continue to be under pressure, according to Sherry Zhao, head of foreign public finance at Fitch Ratings.
She predicted that three additional avenues would be used by municipal administrations to increase revenue:
Reduce the magnitude of tax reductions that were declared during the epidemic.
Asset sales — produce the majority of one-time revenue from the selling or rental of state-owned properties.
Transfers – use more money from the federal budget
According to the Ministry of Finance, the central government of China increased payments to local governments by a staggering 17.1% in 2022 and intends to increase assistance by a further 3.6% this year with transfers totaling 10.06 trillion yuan.
In a different study last week, S&P researchers stated that “transfers to local governments accounted for about 60% of the increase in the central government deficit.”
They don’t anticipate municipal governments turning to off-balance sheet debt as a last resort. Even in areas with poor finances, governments are unlikely to restart using concealed debt funding, such as through local government financing vehicles (LGFVs), according to S&P.
Beijing wishes to wean the nation off its dependence on investment-driven development, which is the obvious long-term tendency.
However, municipal administrations still need to pay their expenses and provide public functions.
According to Rhodium Group in 2021, historically, municipal governments were in charge of more than 85% of spending but only got about 60% of tax income.
seeking additional streams of income
Some municipal governments are experimenting with other revenue-generating strategies, but at the expense of equitable market access for bike-sharing businesses.
According to a list of breaches of market access that China’s National Development and Reform Commission, which is in charge of overseeing economic planning, released in two reports over the past half-year.
The bike-sharing market in China erupted a few years ago, bringing in a deluge of businesses, from small participants to industry titans like Alibaba.
-backed Hello Bike and Mobike were purchased by Meituan, a major Chinese meal delivery company.
.
Due to lax regulations, bicycles frequently clogged walkways.
Currently, some local governments are attempting to limit industry participants to a small number of bike share permits, offered for a number of years.
China’s NDRC economic manager claimed that Zhangjiajie city was one of the instances the central government handled in which a few five-year permits were sold for more than 45 million yuan ($6.6 million), or more than 10 times the beginning price.
The entire deal sum was typically not listed in the other instances that were cited.
A second bike-sharing allotment sale allegedly generated 189 million yuan in May of last year in Shijiazhuang, the capital of the Hebei region close to Beijing. Only the opening offers, which came to 17.3 million yuan for what the city described as “public resources,” were made public.
The Shijiazhuang instance was not mentioned in reports from the economic manager, and the city did not reply to a request for comment.
According to a municipal statement, Meituan’s Mobike did not win a contract, while Alibaba-backed Hello Bike and regional competitors did. Requests for feedback from the two businesses received no response.