"China faces $1 trillion funding gap"

" \n China faces $1 trillion funding gap \n \n\n \n The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase of debt to fill the gap. \n \n\n \n \u201cThe 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,\u201d Ting Lu, chief China economist at Nomura, and a team said in a report last week. \n \n\n \n They estimate a funding gap of about 6 trillion yuan ($895.52 billion) \u2014 roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production, and another 3.5 trillion yuan of lost land sales revenue. \n \n\n \n \u201cMuch of the incoming \u2018stimulus measures\u2019, be it special government bonds or incremental lending by policy banks, will be merely used to fill this funding gap,\u201d the Nomura analysts said. \n \n\n \n It\u2019s that 3.5 trillion yuan figure they expect will be hard to fill, and they listed several measures, from using fiscal deposits to increasing borrowing, that could be used to make up the shortfall. \n \n\n \n Economic data for April showed weakening growth as Covid controls took a toll. Premier Li Keqiang said during a rare nationwide meeting last week that in some respects, the difficulties were greater than in 2020. \n \n\n \n Even before the latest Covid outbreak, land sales, a significant source of local government revenue, have plunged following Beijing\u2019s crackdown on real estate developers\u2019 high reliance on debt. Local governments are also responsible for implementing tax cuts and refunds that Beijing has announced to support growth. \n \n\n \n The Japanese bank and analysts from other firms did not share specific figures on how much additional debt might be needed. But they pointed to growing pressure on growth that would require more support from debt. \n \n\n \n Excluding tax cuts and refunds, the Ministry of Finance said local fiscal revenue grew by 5.4% during the first four months of the year from a year ago. Eight of China\u2019s 31 province-level regions saw a drop in fiscal revenue during that time, the ministry said, without naming them. \n \n\n \n Incomplete data for the period from Wind Information showed the regions of Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin posted year-on-year declines in fiscal revenue for the first four months of the year. Tianjin was the worst with a 27% decline. \n \n\n \n In 2021, Tibet was the only province-level region to see a decline in fiscal revenue, according to Wind. \n \n\n \n It\u2019s \u201cimportant to notice that the decline of fiscal revenue happened not only in cities under lockdown,\u201d said Zhiwei Zhang, president and chief economist, Pinpoint Asset Management. \n \n\n \n \u201cMany cities without Omicron outbreaks also suffered, as their economies are linked to those currently under lockdown,\u201d Zhang said in an email in mid-May. \u201cThe economic costs are not limited to a small number of cities, it is a national problem.\u201d \n \n\n \n Shenzhen sees fiscal revenue plunge \n \n\n \n Since March, mainland China has sought to control its worst Covid outbreak in two years with stay-home orders and travel restrictions in many parts of the country, notably Shanghai and the surrounding region. \n \n\n \n Although financial data isn\u2019t readily available for many Chinese cities, the southern tech hub of Shenzhen released figures showing a 44% year-on-year drop in fiscal revenue in April to 25.53 billion yuan. That followed a 7% year-on-year decline in March to 22.95 billion yuan. \n \n\n \n \u201cThe local governments face mounting fiscal pressure. Their expenditure is rising but revenue dropping,\u201d Zhang said. \u201cLand sales are down sharply as well. I think the central government may have to revise the fiscal budget and issue more debt to help the local governments.\u201d \n \n\n \n Beijing in March already announced an increase in transfer of funds from the central to local governments. When asked in May whether that would be expanded, the Ministry of Finance noted some funding for next year would be transferred ahead of time to help local governments with tax refunds and cuts this year. \n \n\n \n Pressure to spend on infrastructure \n \n\n \n To Susan Chu, senior director at S&P Global Ratings, she\u2019s more concerned about the deficit, the decline in revenue versus spending. Land sales don\u2019t create deficit pressure, she said, noting that \u201cmore pressure will come from infrastructure spending, tax cut allocation.\u201d \n \n\n \n A \u201cwidening deficit means there\u2019s a chance of more borrowing or debt burden in the future,\u201d Chu said in a phone interview earlier this month. While she doesn\u2019t expect off-budget borrowing will come back, she said it is an important signal to watch for assessing risk. \n \n\n \n In late April, Chinese President Xi Jinping called for a nationwide push to develop infrastructure ranging from waterways to cloud computing infrastructure. It was not clear at what scale or timeframe the projects would be constructed. \n \n\n \n \u201cThis year, one consequence will be that there will be less money left over for infrastructure expenditure,\u201d Jack Yuan, VP and senior analyst at Moody\u2019s Investors Service, said in a phone interview earlier this month. \n \n\n \n He said since land sales have been an important source for local government spending on infrastructure, a drop in land sales and limited increase in special purpose bonds would restrict financing options for infrastructure spending. \n \n\n \n \u201cWe expect the debt to continue to climb this year as a result of these economic pressures,\u201d Yuan said, noting it remains to be seen how Beijing decides to balance economic growth with debt levels this year. \n "

"China faces $1 trillion funding gap"

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