The Chinese government is facing an economic shortfall of around 1 trillion dollars which is why it is running out of cash to fund its local governments. The crisis has wreaked havoc on China in such a way that the local governments are adopting cost-cutting measures to run effectively.

According to CNBC, economists project a funding imbalance of nearly 6 trillion yuan ($895.52 billion), made up of roughly 3.5 trillion yuan in lost land sales revenue and another 2.5 trillion yuan in lower revenue as a result of tax refunds and weakened economic output.

Ting Lu, Chief China economist at Nomura, and the team stated in a report, “The latest wave of Omicron and the widespread lockdowns in place since mid-March have resulted in a sharp contraction in government revenue, including land sales revenue.” He added, “Much of the incoming ‘stimulus measures’, be it special government bonds or incremental lending by policy banks, will be merely used to fill this funding gap.”

They identified a number of strategies, from using fiscal deposits to raising borrowing, that may be utilised to make up the shortfall, but they believe the 3.5 trillion yuan figure to be difficult to meet.

WION Journalist Palki S Upadhyay states that China has been in a debt crisis due to two reasons, first, the coronavirus surge and second, the collapse of the real estate sector in recent years.

Reportedly, land sales, a major source of local government’s income, had plummeted even before the most recent Covid epidemic as a result of Beijing’s assault on real estate developers’ heavy reliance on debt. The implementation of tax reductions and refunds that Beijing has announced to promote growth is also the responsibility of local governments.

The Chinese Ministry of Finance reported that local fiscal revenue increased by 5.4 per cent over the first four months of the previous year, excluding tax reductions and refunds. Without naming them, the ministry claimed that eight of China’s 31 province-level regions experienced a decline in fiscal revenue during that period.

For the first four months of the year, fiscal revenue decreased year over year in Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan, and Tianjin, according to incomplete statistics from Wind Information for the period. The city of Tianjin saw the worst decrease of 27%.

Zhiwei Zhang, president and chief economist, of Pinpoint Asset Management, noted that the decline of fiscal revenue happened not only in cities under lockdown but many cities also suffered due to lockdown.

The southern tech metropolis of Shenzhen disclosed figures showing a 44 per cent year-over-year decline in fiscal revenue in April to 25.53 billion yuan, despite the fact that financial data is not easily accessible for many Chinese towns. That came after a 7.0% yearly fall to 22.95 billion yuan in March.

For Susan Chu, senior director at S&P Global Ratings, the deficit and the drop in revenue relative to spending are of more concern. She noted that “additional pressure will come from infrastructure expenditure, tax cut allocation,” noting that “land sales do not produce deficit pressure.”

Chinese President Xi Jinping called for a statewide initiative to expand infrastructure, from rivers to cloud computing infrastructure in the month of April. The scale and timeline of the project’s construction were still unclear.
According to him, a decline in land sales and only a modest increase in special purpose bonds would limit the amount that local governments could borrow to finance infrastructure projects.

 

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