China’s local governments are facing a huge budget deficit, putting heavy pressure on the economy.
According to Reuters, the fiscal deficit of 31 provincial-level administrative regions in China reached 6.74 trillion yuan (nearly $950 billion) in the first eight months of this year.
Calculations from Reuters show that this is the biggest gap between China’s general public revenue and its spending for the period since at least 2012.
Some populous provinces, such as Sichuan, Henan, Hunan, and Guangdong, had the highest fiscal gap.
In China, local governments have long been a major driver of the country’s economic growth. However, after the central government demanded that real estate companies deleverage, many prominent developers suffered liquidity problems and fell into debt crises.
The debt woes have led to a decline in land sales, which in turn has severely weakened the local government’s finances because land sales are their largest non-tax revenue source.
In China, land sales refer to the lease of land-use rights by local governments to companies for a number of years. In 2021, land sales accounted for nearly 42% of local government revenue.
In the first eight months of this year, government land sales were 3.37 trillion yuan (about $470 billion), down 28.5% year-on-year.
Local governments’ budgets also impacted the country’s sluggish economic growth this year, with falling tax revenue and expenditures for COVID pandemic control measures.
Local budget shortfalls are expected to surpass $1 trillion later this year as provinces and cities also have to pay their debts.
So far, many local governments have had to cut salaries, reduce staff, lower subsidies, and even impose high fines to deal with budget shortfalls.
Jennifer Wong is an analyst at the international rating agency Moody’s. She predicted fiscal deficits for China’s local governments would remain substantial this year because of the property slowdown and lingering effects of the COVID pandemic shock.
The budget stress is reducing local governments’ power to fund infrastructure spending and tax cuts.
It is also cutting incomes for some households, a red flag for consumption. As a result, it is raising risks for the world’s second-biggest economy.