Fiscal revenues of China’s central and local governments are falling to nearly the lowest in history due to the country’s economic downturn, especially the decline of land sales.

China Watch citing China’s Ministry of Finance data reported that, as of the end of June, the balance of local government debt was 34.75 trillion yuan ($5.2 trillion).

The hidden debt is likely even more worsening, becoming a “time bomb” for the economy.

The source of income of local governments is mainly composed of three parts: tax revenue, transfer payment, and land sales.

In 2021, only 8 provinces and cities saw fiscal surpluses, including Guangdong, Shanghai, Jiangsu, Zhejiang, Beijing, Tianjin, Shandong and Fujian. The remaining 23 provinces and cities were subsidized by the central government.

In the past, local governments’ fiscal revenue relied heavily on land sales, but income from land sales has declined in recent years.

In the past two years, due to the Covid epidemic, the economic growth has slowed down, the provincial fiscal revenue has been decreasing. The central government’s subsidization to the provinces has also been weakening.

The recent turmoil in the real estate market has led to the decline in fiscal revenue of local governments that rely on land sales.

Lu Ting, chief China economist at Nomura Securities, said that the downturn of the real estate sector has huge impacts because this sector and the relevant upstream and downstream industries contribute a quarter of China’s gross domestic product.

Over the past 20 years, whenever the economy has been sluggish, Beijing authorities have loosened regulations on the real estate sector to boost housing demand.

However, the numbers are not positive this year. In June, for example, new house sales were down 45% year-on-year, house completions down 41%, land sales down 53% by area and 65% by value.

According to Lu Ting, the income from land sales of local governments will decrease by about 40-50% this year.

Hong Hao is a well-known financial analyst. In a tweet on July 26, he pointed out that China’s central and local governments’ fiscal revenues have collapsed to a historical low. He said that, in the past, they could survive thanks to the land sales, but this time they are only relying on the bond sales.

Data released by the Ministry of Finance on July 26 revealed that local governments issued 1.6 trillion yuan ($237 billion) of new bonds in June. The issuance of new bonds in the first half of 2022 was more than 4 trillion yuan ($593 billion).

As of the end of June 2022, the balance of local government debt was 347.5 trillion yuan ($51.5 trillion).

As of June, the average term of local government bonds remaining is 8.4 years, and the average interest rate is 3.44%.

But hidden debt is believed to be even more staggering.

Hidden debt is a financing item that governments across China can keep off their balance sheets, but financial markets still treat it as a local government liability.

Currently, the Ministry of Finance has provided no data on the size of local governments’ hidden debt.

According to China News Weekly, the balance of interest-bearing liabilities of the urban investment platforms is often used to estimate the scale of hidden debt. As of September 2021, the balance of interest-bearing debt on the urban investment platforms was 49.3 trillion yuan ($7.3 trillion).

Zhang Bin is deputy director of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences. He said that the balance sheet of the urban investment platforms is relatively fragile, so the hidden debt of local governments has become a major source of financial risk.

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