China faces a financing gap of nearly $1 trillion. He will need more debt to fill it.


In the first four months of the year, investments in real estate development fell by 2.7% compared to a year ago. Pictured is a project in Qingzhou, Shandong province on May 15, 2022.

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BEIJING — The Chinese government is facing a growing cash crunch, analysts say, as they forecast rising debt to fill the void.

“The latest wave of Omicron and the widespread lockdowns in place since mid-March have led to a sharp contraction in government revenue, including land sales revenue,” said Ting Lu, chief China economist at China. Nomura, and a team in a report last week. .

They estimate a funding shortfall of about 6 trillion yuan ($895.52 billion) – about 2.5 trillion yuan in declining revenue due to tax refunds and weaker economic output, and Additional 3.5 trillion yuan in lost land sales revenue.

“Much of the incoming ‘stimulus’, whether special government bonds or additional loans from political banks, will simply be used to fill this funding gap,” Nomura analysts said. .

It is this 3.5 trillion yuan figure that they expect will be difficult to meet, and they listed several measures, ranging from using tax deposits to increasing borrowing, that could be used to make up the shortfall.

April economic data showed weakening growth as Covid controls took their toll. Premier Li Keqiang told a rare national meeting last week that in some respects the difficulties were greater than in 2020.

Even before the latest Covid outbreak, land sales, a major source of local government revenue, plunged following Beijing’s crackdown on property developers’ heavy reliance on debt. Local governments are also responsible for implementing the tax cuts and refunds that Beijing has announced to support growth.

The Japanese bank and analysts at other firms did not share specific figures on how much additional debt might be needed. But they pointed to growing pressure on growth that would require more debt support.

Excluding tax cuts and refunds, the Ministry of Finance said local tax revenue rose 5.4% in the first four months of the year compared to a year ago. Eight of China’s 31 provincial-level regions saw a decline in tax revenue during the period, the ministry said, without naming them.

Incomplete data for the period of Wind Information showed that the regions of Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin saw lower tax revenue year on year. each other for the first four months of the year. Tianjin was the worst with a 27% drop.

In 2021, Tibet was the only province-level region to see a decline in tax revenue, according to Wind.

It’s “important to note that the decline in tax revenue hasn’t just happened in cities under lockdown,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.

“Many cities without Omicron outbreaks have also suffered, as their economies are tied to those currently in lockdown,” Zhang said in an email in mid-May. “The economic costs are not limited to a small number of cities, it is a national problem.”

Shenzhen sees its tax revenues fall

Since March, mainland China has sought to control its worst Covid outbreak in two years with stay-at-home orders and travel restrictions in many parts of the country, including Shanghai and the surrounding region.

Although financial data is not readily available for many Chinese cities, the southern technology hub of Shenzhen released figures showing a 44% year-on-year drop in tax revenue in April to 25.53 billion yuan. This follows a 7% year-on-year decline in March to 22.95 billion yuan.

“Local governments are facing increasing fiscal pressure. Their expenses are increasing but their revenues are falling,” Zhang said. “Land sales are also down sharply. I think the central government may need to revise the fiscal budget and issue more debt to help local governments.”

Beijing already announced in March an increase in transfers of funds from the central government to local governments. When asked in May if this would be extended, the Finance Ministry said some funds for next year would be transferred up front to help local governments with refunds and tax cuts this year.

Pressure to spend on infrastructure

For Susan Chu, senior director at S&P Global Ratings, she’s more concerned about the deficit, the decline in revenue relative to spending. Land sales are not creating pressure on the deficit, she said, noting that “more pressure will come from infrastructure spending, allocation of tax cuts.”

A “growing deficit means there is a chance of having more borrowing or indebtedness in the future,” Chu said in a phone interview earlier this month. While she doesn’t expect off-budget borrowing to return, she said it’s an important signal to watch for in assessing risks.

In late April, Chinese President Xi Jinping called for a national push to develop infrastructure ranging from waterways to cloud computing infrastructure. It was unclear on what scale or when the projects would be built.

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“One of the consequences this year will be that there will be less money left for infrastructure spending,” said Jack Yuan, vice president and principal analyst at Moody’s Investors Service, in an early phone interview. of the month.

He said that with land sales being a major source of local government spending on infrastructure, a decline in land sales and a limited increase in special purpose bonds would limit options for financing infrastructure spending.

“We expect debt to continue to climb this year due to these economic pressures,” Yuan said, noting that it remains to be seen how Beijing decides to balance economic growth with debt levels this year. .


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