The fiscal deficits in China’s provinces have reached $1 trillion, which not only limits the financial power of the provinces for infrastructure, but also puts a lot of pressure on the Chinese economy for 2023.

In the first eight months of this year, the fiscal deficit of China’s 31 provincial-level administrative regions was 6.74 trillion yuan (about $948 billion), the largest deficit since 2012 when compared to local government statistics for the past 10 years, with Sichuan, Henan, Hunan and Guangdong having the deepest debts according to Reuters.

Local governments have long been the main driver of China’s economic growth, but after the CCP continued to demand that real estate companies “forego debt,” many major developers ran into liquidity problems and fell into a debt crisis. This has led to a decrease in the land-use right transfer fees, severely weakening local finances.

According to The Epoch Times, land-use rights transfer fees are the largest source of non-tax revenue for Chinese local governments. In China, land transfers are local governments leasing land-use rights to companies for many years. In 2021, land-use rights transfer fees already account for about 41.6% of local government revenue, and this amount would increase when taxes collected from land are taken into account.

The situation is exacerbated by China’s feeble growth, weak tax income, and crippling COVID restrictions.

Local governments must also pay their debts in the coming months, which foreshadows financial difficulties. Many local governments have cut wages, cut staff, reduced subsidies, and even imposed disproportionately high fines to deal with budget shortfalls.

According to Reuters, provinces such as Shandong, Shanxi, Henan, Zhejiang, and Tianjin have begun cutting government budgets in recent months due to financial pressure. From January to July, local government fines increased by 10.4% year-on-year, according to statistics from financial media Yicai.

According to statistics, government land sales, counted separately, tumbled 28.5% year-on-year to 3.37 trillion yuan (about $429.28 billion), adding urgency to the need to restore the financial health of indebted real estate firms. Moody’s analyst Jennifer A. Wong said, “With the slower growth this year, we expect fiscal deficits for regional and local governments will remain substantial, reflecting the property slowdown and lingering effects of the coronavirus shock.”

Luo Zhiheng, chief economist at Yuekai Securities, warned that the Chinese regime must widen the fiscal deficit and that next year’s economy will still focus on spending on infrastructure and stabilizing the real estate market. He said the local government debt ceiling should also be raised so that more bonds can be sold to meet “unexpected demand.”

China’s budget deficit next year needs to exceed 3% of gross domestic product (GDP) to cope with mounting fiscal pressures, he said.

Luo believed that the maturing debts of local governments will peak in 2023, putting them in a liquidity difficult position.

Combined with some maturing debt from the local government financing vehicle (LGFV), this year and next will be the most stressful for local governments, he said.

According to a Moody’s report in August, about 380 billion yuan ($53 billion) of domestic LGFV bonds in weaker economic provinces will be due for repayment in the next 12 months.

Nie Wen, an economist at Hwabao Trust in Shanghai, said such fiscal constraints, combined with weakening exports, low confidence in consumption, and external uncertainties, including the Russia-Ukraine war, will increase pressure on policymakers to support the economy in 2023.

Fiscal pressures are slashing incomes for some households, a red flag for broader consumption and growth.

An employee surnamed Gao at a government agency in Chongqing told Reuters, “My annual income was slashed by 27% to around 80,000 yuan ($11,000) last year, due to the very heavy local fiscal burden.”

Gao went on, “Our leaders are very anxious as they said the current fiscal allocation is not enough. There is no way out, they have had to ask the local government fiscal department for money.”

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