China’s insistence on zero-Covid policy is forcing almost all local governments to run fiscal deficits, which poses a serious threat to the overall economy.

Bloomberg reported that all 31 provincial administrative regions in mainland China, except for Shanghai, suffered a budget deficit in the first seven months of 2022.

Coffers of provinces and cities across China have been drained after they implemented trillions of yuan of tax rebate and fee reduction measures to support local businesses.

In addition, local authorities had to cover the high cost of Covid containment measures, such as large-scale testing, lockdown and control.

At the same time, China’s real estate market has fallen into a deep depression. The plunging land sales squeezed a key funding source of local governments, making the situation worse.

Bloomberg pointed out the case of Jilin province. In its first-half budget implementation report, the northeast province warned that the conflicts between budget revenue and budget expenditure have become more prominent.

Finances at almost half of the 60 county-level administrative districts in the province are very tight, and they are exposed to operational risks.

In Fujian province, the situation at Changtai district also highlights the challenges for the local government.

Bloomberg cited official data pointing out that the district spent 32 million yuan ($4.6 million) on Covid pandemic prevention measures in the first half of this year. That figure is 5.6 million yuan higher than the district’s budget at the beginning of the year.

Meanwhile, the income from the land transfer fee of residential commercial land is zero. So Changtai district had to cut spending in other areas, such as stopping paying some bonuses to government employees.

According to China’s Ministry of Finance, the country’s land transfer revenue plummeted 29% on-year to about 3.4 trillion yuan in the first eight months.

Tax revenues at local governments have also been squeezed. Provinces granted 2.2 trillion yuan in tax rebates through the end of August, a third more than what was planned for the whole year.

Besides, local authorities have used up most of the bond sales quota set for this year. Provinces and cities have sold 4.25 trillion yuan of bonds so far this year, accounting for 87% of the annual amount permitted.

Regarding the fiscal prospects, the local government could face more pressure.

According to Bloomberg, the local authorities could strengthen their efforts to contain the Covid pandemic around the Chinese Communist Party’s 20th Party Congress. Their measures would include requiring residents to conduct large-scale Covid testing more frequently and imposing more lockdowns, which could further exacerbate local fiscal woes.

With the limits in budget revenue sources and restrictions in spending, China’s economy would find a rocky way to a recovery.

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