Local governments in China are finding new ways to raise money amid debt concerns

BEIJING – China’s heavily indebted local governments need new ways to raise money under a centralized system that has made clear its priority is to reduce financial risk.

Direct debt to local governments exceeded 120% of revenue in 2022, S&P Global Ratings analysts said, noting that this exceeds what Beijing has informally said is an acceptable debt level.

“The country’s provinces and municipalities have relied heavily on expanded bond issuance to weather the coronavirus-induced economic slowdown and collapsing land sale proceeds,” S&P analysts said in a report last month.

International Monetary Fund data shows that China’s outright domestic government debt nearly doubled over five years to the equivalent of $5.14 trillion – or 35.34 trillion yuan – last year. This does not include several other categories of related, fast-growing debt such as “local government financing mechanisms” (LGFV) – which have allowed regional authorities to tap into bank loans for infrastructure projects.

China’s central government is paying attention.

In China’s annual government work report released this month, an entire section is devoted to preventing and diffusing major risks – mainly in real estate and local government debt. With regard to local governments, the report said: “We must prevent the accumulation of new debt while working to reduce existing debt.” Situation.

Ting Lu, chief China economist at Nomura, noted that the topic was not given that much importance in last year’s report.

Coupled with a conservative growth objective [of around 5%]This may indicate a possible shift in focus to address fiscal risks and hidden debts from local governments sometime this year, particularly in the second half, after the economic recovery has largely plateaued.”

Recent major speeches by Chinese President Xi Jinping have used similar language in calling on officials to address systemic risks. New Premier Li Qiang this month also identified “risk prevention and de-escalation” policies as one of the government’s priorities in the near term.

Shi too Emphasis on tackling corruptionwhich was a problem that was prevalent in China – including at the local level.

Over the past three years, covid and the real estate downturn have slashed local government revenue, though it’s unclear exactly how much.

The official data provides some insight. The country’s health spending rose about 18% last year to 2.25 trillion yuan, the finance ministry said, after barely growing in 2021.

A budget category called local government funds saw revenue from land sales drop 23.3% to 6.69 trillion yuan — a loss of about $288 billion. Standard & Poor’s and other analysts estimate that land sales account for about a quarter of all local government revenues.

In China, land is owned by the government and sold to companies for development—use agreements last for 70 years if the project is residential.

Revenue related to real estate is likely to remain under pressure as homebuyer sentiment has not fully recovered, said Sherry Zhao, director of international public finance, Fitch Ratings.

She said local governments are likely to turn to three other channels to raise revenue:

• Taxes – Reduce the level of tax cuts announced during the pandemic
• Asset sales – often generate one-time income from the sale or lease of state-owned assets
• Transfers – Withdraw more central government money

China’s central government increased its transfers to local governments by a whopping 17.1% in 2022, and plans to increase subsidies by another 3.6% this year with 10.06 trillion yuan in transfers, according to the Finance Ministry.

“Transfers 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.

They don’t expect local governments to default on off-balance sheet debt. “Even in fiscally weak regions, governments are unlikely to resume the use of hidden debt financing, for example through local government financing mechanisms (LGFVs),” S&P said.

“The long-term trend is clear: Beijing wants to reduce the country’s dependence on investment-driven growth.”

But local governments still have public utility bills to pay for.

Historically, local governments were responsible for more than 85% of expenditures but received only 60% of tax revenues. 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.

This is according to the lists of Market Access Violations published in two sections Reports in the latter half of the year of the China National Development and Reform Commission, which oversees economic planning.

China’s bike-sharing industry exploded several years ago, attracting a flood of companies from small businesses to behemoths like Hello Bike and the Alibaba-backed Mobike, which was acquired by Chinese food-delivery giant Meituan.

Limited regulation often means swathes of bikes crowd the sidewalks.

Now, some local authorities are trying to restrict industry players to a few bike share lots, which are sold for a multi-year period.

Among the issues handled by the central government, China Economic Planner NDRC said Zhangjiajie City It sold a few five-year stakes for more than 45 million yuan ($6.6 million) — more than 10 times the starting price.

Most of the other cases mentioned did not mention the total transaction amount.

Another bike stake auction in May last year It reportedly collected 189 million yuan in Shijiazhuang, The capital of Hebei Province, near Beijing. The city only disclosed preliminary bids for what it called “public resources”, which amounted to 17.3 million yuan.

The reports from the economic plan did not include the Shijiazhuang case, and the city did not respond to a request for comment.

While Hello Bike backed by Alibaba and local players won a bid, Meituan’s Mobike did not, According to a city statement. The two companies did not respond to requests for comment.