July 2, 2022

China faces a financing gap of nearly a trillion dollars.  You will need more debt to pay it off.

China faces a financing gap of nearly a trillion dollars. You will need more debt to pay it off.

During the first four months of the year, investment in real estate development was down 2.7% from a year ago. Pictured here is a project in Qingzhou, Shandong Province on May 15, 2022.

CFOTO | Future Publishing | Getty Images

BEIJING – The Chinese government is facing a growing cash shortage, analysts said, as they expect debts to rise to fill the gap.

“The recent wave of Omicron and large-scale shutdowns since mid-March has led to a severe contraction in government revenue, including land sales revenue,” Ting Lu, Nomura’s chief China economist, and team said in a report last week. .

They estimate a funding gap of about 6 trillion yuan ($895.52 billion) — nearly 2.5 trillion yuan in revenue declines due to tax refunds and weak economic production, and another 3.5 trillion yuan in lost land sales revenue.

Nomura analysts said that “a lot of upcoming ‘stimulus measures’, whether it’s private government bonds or additional lending by political banks, will only be used to fill this funding gap.”

It’s a 3.5 trillion yuan figure that they expect will be difficult to fill, and they have listed several measures, from using financial deposits to increasing borrowing, that can be used to make up the shortfall.

April economic data showed weak growth as Covid controls took their toll. Premier Li Keqiang said During a rare nationwide meeting Last week the difficulties were in some ways greater than they were in 2020.

Even before the recent Covid-19 outbreak, land sales, an important source of local government revenue, had plummeted in the wake of Beijing’s crackdown on real estate developers relying too heavily on debt. Local governments are also responsible for implementing the tax cuts and refunds that Beijing has declared support growth.

The Bank of Japan and analysts from other companies did not share specific numbers on the amount of additional debt that might be required. But they noted the mounting pressure on growth that may require more support from debt.

Excluding tax cuts and refunds, the Ministry of Finance said domestic fiscal revenue grew 5.4% during the first four months of the year compared to last year. Eight out of 31 provincial-level regions in China experienced a decline in fiscal revenue during that period, the ministry said, without mentioning it.

Incomplete data for the period from wind information showed that Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin regions recorded a year-on-year decline in fiscal revenue for the first four months of the year. Tianjin was the worst with a 27% decline.

In 2021, Tibet was the only provincial-level region that experienced a decline in fiscal revenue, according to The Wind Company.

“It is important to note that the decline in fiscal revenue has not only occurred in cities under lockdown,” said Chui Zhang, president and chief economist at Pinpoint Asset Management.

“Many cities without an Omicron outbreak have suffered, because their economies are tied to those currently under lockdown,” Zhang said in an email in mid-May. “The economic costs are not limited to a few cities, it is a national problem.”

Shenzhen expects lower financial revenue

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

Although financial data is not readily available for many Chinese cities, the Southern Technology Center in Shenzhen released figures showing a 44% year-on-year decline in fiscal revenue in April to 25.53 billion yuan. This followed a 7% year-on-year decline in March to 22.95 billion yuan.

“Local governments are facing increasing financial pressure. Their spending is going up but revenue is going down,” Zhang said. “Land sales are also down sharply. I think the central government may have to review the fiscal budget and issue more debt to help local governments.”

Beijing already announced in March an increase in the transfer of funds from the central government to local governments. When asked in May if that would be expanded, the Treasury indicated that some funding for next year would be transferred early to help local governments take back taxes and cuts this year.

Pressure to spend on infrastructure

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“This year, one of the consequences will be that there will be less money left for infrastructure expenditures,” Jack Yuan, vice president and chief analyst at Moody’s Investors Service, said in a phone interview earlier this month.

He said that since land sales have been a significant source of local government spending on infrastructure, lower land sales and a limited increase in special purpose bonds would restrict financing options for infrastructure spending.

“We expect debt to continue rising this year as a result of these economic pressures,” Yuan said, noting that it was not yet clear how Beijing would decide to balance economic growth and debt levels this year.