China’s ‘common prosperity’ to squeeze cash-strapped local governments

BEIJING — Local governments in China have long been burdened with debt. Now, Chinese leader Xi Jinping promotes “Common Prosperity” is putting more pressure on them — while eliminating some of their most trusted sources of income.

Mr. Xi’s drive, in part to narrow the gap between rich and poor in China, stems from an effort to tackle the rising costs of education, healthcare and housing – often referred to as the “three tops”. Big mountain”.

Over the past year, Beijing has imposed a series of regulatory actions to rein in China’s private education and real estate sectors. At the same time, Beijing has pledged to expand public education, health care and housing services, and promised to promote the provision of childcare and aged care services as it tries to solve the problem. address demographic challenges.

With The local government is heavily indebted Economists are questioning the viability of this policy.

“Financial aspirations are not growing,” said Daniel Rosen, co-founder and partner of New York-based Rhodium Group, which studies the Chinese economy. “You can’t have everything the government promises, based on the government’s ability to pay.”

Beijing has yet to release specifics on many of the services the Chinese government will provide, but economists expect the bill to have major traction. Across China, for example, teachers have been asked to work overtime to fill the gap caused by New restrictions on private education companies—Part of a broader initiative to create educational opportunity.

In Beijing, Ding Jianxiong is grateful that the authorities severely restricted Chinese for-profit education companies and instead committed to providing free extracurricular programs in public schools.

“All these after-school classes are free, thanks to the government,” said Ding, whose first-grade daughter is now staying at the school for two more hours, taking sports and art classes. “It saves a lot of money and time.”

The problem is that much of the cost is being shouldered by local governments, already strained under financial pressures. According to the latest official figures, provincial, city and county governments have funded more than 80%, 70% and 60% of China’s financial spending on education, health and housing projects. in, the rest comes from the central government.

According to calculations by Zhang Zhiyong, a scholar at Beijing Normal University, in recent years, about one-fifth of China’s county governments have not increased spending on education. According to state media and government reports, teachers in dozens of districts around the country have not received adequate wages since the Covid-19 pandemic began, prompting the Ministry of Education to prioritize pay teachers salaries in recent months.

Plunging debt has forced the rusty belt city of Hegang, on the northeastern border with Russia, to undertake China’s first provincial restructuring. In December, the city canceled efforts to recruit new grassroots staff, according to reports by state media.

Sanitation workers clear snow on a street in Hegang, China, late last year.


Xie Jianfei / Zuma Press

Meanwhile, 2,500 kilometers away on China’s southwestern border with Vietnam, debt pressure on Honghe province has resulted in millions of dollars in unpaid wages for doctors and teachers, according to a monthly report. 4 in 2021 of the legislators there. As the central and provincial governments pledged more services to support the people of the 4.5 million-strong district, Honghe’s county governments turned to informal lending channels, the report said. increase their inherent debt burden.

“It is common for superiors to set policies and subordinates to pay bills,” the report said.

China’s provincial office and Ministry of Finance did not respond to requests for comment.

Long before the commonwealth campaign, there were concerns about the finances of China’s local governments.

Local officials are often rewarded for delivering strong economic growth, leading them to rely on large-scale borrowing to finance infrastructure projects to achieve gross national product goals. interior. According to data from China’s Ministry of Finance, local governments have accumulated more than $4 trillion in debt by the end of 2020, up 20% from a year earlier. That debt is seen by economists and Beijing itself as a threat to the country’s financial stability.

At the centenary of the Communist Party of China in 2021, President Xi Jinping made the call to defy foreign pressure. As China challenges US leadership – from AI to defense – WSJ’s Jonathan Cheng will consider what’s next for the country. Photo: Wang Zhao / AFP

That amount is seen by many as an underestimate, with substantial debt buried in funding vehicles and disguised under other forms.

Beijing did not focus its attention on curbing local government debts when the economy recovered last year, placing limits on how much it could borrow. In December, Vice Finance Minister Xu Hongcai said the central government would continue its efforts to reduce local debts and reiterated that there would not be any bailout for governments that cannot afford it. pay.

Meanwhile, China’s leaders have waged a parallel campaign to tame China’s overheated property sector, which has cut off the local government’s other favorite funding channel. : sell land.

Strict limits on leverage for property developers have hampered the ability of China’s one-time free-spending property firms, such as

China Evergrande Group,

to buy land through auction — a source of income that accounted for more than 40% of self-increasing revenue for China’s local governments in 2020, according to Wall Street Journal calculations based on Treasury Department data.


A development of China Evergrande on the outskirts of Nanjing, China.


Qilai Shen / Bloomberg News

In November, the most recent month for which data is available, local government revenue from land sales fell 9.9% from a year earlier.

Goldman Sachs

Economists predict revenue from land sales could drop 15% this year, a funding gap they estimate would require issuance of more than $78.2 billion worth of local government bonds to fill.

To address the funding problem, policy adjustments could include expanding the property tax to more regions of the country or increasing revenue through a capital gains tax, economists say. Some local governments also run businesses with which they can either share in larger profits or sell them off.

China has announced a 5-year wealth tax trial in some regions. The property tax, if implemented properly, could help solve the long-term financial problems of local governments, but analysts warn that in the short term it could affect home purchases and reduce local government revenue from land sales.

Betty Wang, China economist at investment bank ANZ, said: “Even in the long run, whether revenue from property taxes is large enough to become the main source of revenue for local governments. “. By her estimates, property tax revenue could be as little as one-fifth of the revenue from land sales, if implemented nationally.

Another solution could be to allow local governments to borrow more or increase fiscal transfers from the central government, argues Hui Shan, chief China economist at Goldman Sachs.

Beijing is also aware of the funding problem and has committed to further fiscal reform – but the process has been slow and is on hold, Shan said.

“The fundamental disparity between local government revenues and expenditures has not yet been fully resolved,” she said.

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