The Perfect Enemy | China’s Covid-19 burden forces local governments to slash spending
December 1, 2022
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At the annual parliamentary meetings in March, China’s premier Li Keqiang vowed to transfer a record 9.8 trillion yuan (US$1.3 trillion) to local governments this year, up 18 per cent from 2021.

But not even that is enough for some local governments such as Dongyang city in Zhejiang province.

Dongyang recently cut its annual budget revenue target by 12.7 per cent to 7.86 billion yuan for this year.

“There is still a gap between the city’s new available funds and the city’s demand for additional expenditure,” the city’s government said in its revised budget report early this month.

“We will actively take measures to solve the problem by implementing strict savings to reduce general expenditures and seeking funds from the provincial government.”

Naan district in the megacity Chongqing will cut budgeted expenditure by 229.87 million yuan and spend the money on personnel transfers within the public sector, salary adjustments and Covid-19 prevention and control.

China’s slowing economy, the severe decline in the real estate industry and central government mandated tax rebates have put “unprecedented” pressure on fiscal revenue reduction, the Naan district government said in its revised budget report this month.

“Coupled with the frequent occurrence of Covid-19 outbreaks, unexpected factors such as continuous sunny and high temperature weather and increased investment in forest-fire prevention exceeded expectations. It is difficult to maintain the annual balance of revenue and expenditure,” it said.

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Beijing has been encouraging tax reforms at the local level which could help diversify revenues away from land sales. Shenzhen has been designated as a pilot city for national tax reform to improve the fiscal system and debt management.

The State Council in June unveiled some steps to improve the allocation of resources among local governments to help ease growing fiscal strains and debt risks.

China has in recent years taken measures to shore up the finances of debt-laden local governments, partly through lifting transfer payments from the central government.

Analysts at Ping An Securities believe the worst might be over for local governments, estimating that actual fiscal income for the year may be 3.4 trillion lower than budgeted but average expenditure is likely to decline in the coming months.

If they can’t cut debt levels, the risk [of default] will rise Ark Huang

“In October, the public fiscal revenue was up 15.7 per cent year on year in a single month, a new high for the year,” Ping An Securities said in a note on November 17, adding that it expects non-tax revenue to rebound.

Ark Huang, associate director at Fitch’s international public finance team for Asia-Pacific, said the central government has kept a tight grip on so-called hidden debt risk, which comes from off-budget borrowing by local government financing vehicles (LGFVs).

LGFVs are used by local governments to fund infrastructure spending but disclosure is often weak.

“If they can’t cut debt levels, the risk [of default] will rise,” Huang said.