China’s Economy Tested by Strained City Finances
By Wall Street Journal staff, July 31, 2022
Local governments in China have limited power to tax and raise funds directly. About 60% of most tax revenues goes to the central government, while local governments pocket the rest. Borrowing by local governments is restricted under an annual quota
allocated by Beijing.
Over the past two decades, local governments have skirted official limits and amassed a huge volume of debt by borrowing through opaque channels, including special-purpose entities known as local government financing vehicles.
Collectively, local governments had the equivalent of more than $5 trillion in debt as of June, up 26% from a year earlier, according to data from China’s Finance Ministry. Actual debt levels can be much higher, economists say, once off-budget channels
like local government financing vehicles are considered.
Beijing has shown little appetite for allowing local governments to borrow more aggressively. Requests from some economically battered provinces including Hebei and Liaoning to raise debt limits were rejected by the ministry in July.
“From the regulators’ perspective, they don’t want to undo yearslong efforts in reining in excessive debts,” said Amanda Du, a senior analyst at Moody’s Investors Service.
Local governments were able to cover some holes in their accounts in past years by cranking up land sales to developers in China’s once-hot property market. Land sales plunged by around 30% during the first six months of this year from a year ago.
Adding to the pressure is Beijing’s zero-Covid policy, which compels cities with Covid problems to institute mass testing.
In many cities, residents must show negative results from tests taken in the previous 48 or 72 hours to perform basic tasks such as shopping for groceries or taking public transportation.
If China tests residents every 3 days for the rest of the year in large cities, which cover about 30% of the total population, it could cost 706 billion yuan ($105 billion), according to calculations by economists from Goldman Sachs.
In China’s central Henan province, where Covid cases have appeared this summer, plans to set up more than 14,000 testing booths and swab the province’s roughly 98 million population every three days could cost at least 40 billion yuan ($6 billion) a
year, according to calculations based on government procurement documents.
That means the cost of regular testing could amount to about 4% of Henan’s general public budget expenditure last year, exceeding total spending on education in 2021.
Henan officials didn’t respond to a request for comment.
In late May, authorities in Sichuan province’s Langzhong city asked residents to pay out of pocket for weekly mandatory Covid tests, in part because the government can’t afford ongoing testing, according to the official People’s Daily, which cited
an unnamed official from the local health authority.
Langzhong officials didn’t respond to a request for comment.
https://www.wsj.com/articles/chinas-economy-tested-by-strained-city-finances-11659261600
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