• Fiscal strains build up in times of national and global uncertainty
  • Policymakers face a tough test as global recession risks rise
  • Largest budget deficit for the period since at least 2012
  • Financial difficulties and real estate strains pose risks for GDP growth in 2023

BEIJING, Oct 17 (Reuters) – By any measure, $1 trillion seems huge. That’s the scale of the budget deficits facing China’s provinces, reducing their fiscal firepower to fund infrastructure spending and tax cuts, and increasing risks for the world’s second-largest economy in 2023.

The timing couldn’t be worse for policymakers in Beijing, as the economy reels under the weight of global recession risks, soaring commodity prices, rising geopolitical tensions and widespread COVID lockdowns. -19 at home – spoiling the context of a once-in-five-year congress of the ruling Communist Party which started on Sunday.

Local governments have long been a priming pump for China’s growth, but falling revenue from the sale of state land following an ongoing debt crackdown in the sector has severely eroded their financial power. – a situation exacerbated this year by weak growth in China, low income taxation and crippling COVID restrictions. Read more

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Local governments must also repay their debt in the coming months, which portends more financial difficulties and limits their ability to meet Beijing’s demands for increased spending. Already, many have resorted to cutting wages, downsizing, cutting subsidies and even imposing disproportionate fines to make up for budget shortfalls.

In the first eight months, China’s 31 provincial-level regions reported a gap between general government revenue and expenditure totaling 6.74 trillion yuan ($948 billion). It’s the widest for the period since at least 2012, Reuters calculations from local government data showed over the past decade, with the populous provinces of Sichuan, Henan, Hunan and Guangdong suffering the bigger deficits.

Over the same period, government land sales, counted separately, fell 28.5% year-on-year to 3.37 trillion yuan, pressing the need to restore the financial health of real estate companies in debt.

“With growth slowing this year, we expect regional and local government budget deficits to remain large, reflecting the housing slowdown and the lingering effects of the coronavirus shock,” said Jennifer A. Wong, analyst at Moody’s, which expects economic growth in 2022 to slow to 3.5% from 8.1% in 2021.

In the past, deficits were largely offset by central government transfer payments and funds carried over from previous years, but analysts say slowing economic growth could limit such aid this time around.

Policymakers will also be hesitant to fill the fiscal vacuum with large-scale monetary stimulus, as a wave of global interest rate hikes to rein in runaway inflation sent U.S. bond yields higher, widening the yield gap. between US and Chinese debt.


Treasury bond quotas could be increased, so some of them could be transferred to local governments to ease their fiscal strains, said Luo Zhiheng, chief macroeconomic analyst at Yuekai Securities.

However, they face a squeeze on their already tight cash flow as maturing local government debts peak in 2023 for the 2021-2025 period, Luo warned.

Combined with some maturing debt from local government finance vehicles (LGFVs) – investment companies that build infrastructure projects – this year and next will be the most stressful for local governments, he said. declared.

About 380 billion yuan of onshore LGFV bonds from economically weaker provinces are due to be repaid over the next 12 months, according to a Moody’s report in August.

Such fiscal constraints, coupled with weakening exports, doubts over a recovery in consumption and external uncertainties, including war in Ukraine, would put additional pressure on policymakers to strengthen the economy in 2023. , said Nie Wen, a Shanghai-based economist at the Hwabao Trust.

Nie projects GDP growth of 5.5% next year, assuming little to no disruption from COVID-19, better than the broad consensus of 3.2% for this year, but still lagging the pace pre-pandemic by 6.0% in 2019.


Underscoring the strain on finances, the provinces of Shandong, Shanxi, Henan, Zhejiang as well as the municipality of Tianjin said they had all cut budgeted staff numbers from government agencies in recent months.

Moreover, some local market regulators have even imposed excessively high fines on small businesses to increase their revenue.

According to financial news outlet Yicai, local government revenue from fines and confiscations jumped 10.4 percent in January-July year-on-year.

Additional spending to contain COVID outbreaks has also strained local government finances.

Fiscal strains reduce income for some households, a wake-up call for consumption and broader growth.

“My annual income was reduced by 27% to about 80,000 yuan last year, due to the very heavy local tax burden,” an employee named Gao from a government agency in Chongqing told Reuters.

“Our leaders were very worried these days because they said that the current budget allocation is not enough at all. Since there is no way out, they had to ask the tax department for money. of the local government.”

($1 = 7.1135 Chinese yuan renminbi)

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Reporting by Ellen Zhang and Ryan Woo Editing by Shri Navaratnam

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