China’s local government debt problems are a hidden drag on economic growth
Local governments in China are still building highways, bridges and railways, as pictured here in Jiangxi province on Sept. 6, 2024.
Cfoto | Future Publishing | Getty Images
BEIJING — China’s persistent consumption slowdown traces back to the country’s real estate slump, and its deep ties to local government finances — and debt.
The bulk of Chinese household wealth went into real estate in the last two decades, before Beijing began cracking down on developers’ high reliance on debt in 2020.
Now, the values of those properties are falling, and developers have reduced land purchases. That’s cutting significantly into local government revenue, especially at the district and county level, according to S&P Global Ratings analysts.
They predicted that from June of this year, local government finances will take three to five years to recover to a healthy state.
But “delays in revenue recovery could prolong attempts to stabilize debt, which continues to rise,” Wenyin Huang, director at S&P Global Ratings, said in a statement Friday to CNBC.
“Macroeconomic headwinds continue to hinder the revenue-generating power of China’s local governments, particularly as related to taxes and land sales,” she said.
Huang had previously told CNBC that the financial accounts of local governments have suffered from the drop in land sales revenue for at least two or three years, while tax and fee cuts since 2018 have reduced operating revenue by an average of 10% across the country.
This year, local authorities are trying hard to recoup revenue, giving already strained businesses little reason to hire or increase salaries — and adding to consumers’ uncertainty about future income.
Clawing back tax revenue
As officials dig into historical records for potential missteps by businesses and governments, dozens of companies in China disclosed in stock exchange filings this year that they had received notices from local authorities to pay back taxes tied to operations as far back as 1994.
They stated amounts ranging from 10 million yuan to 500 million yuan ($1.41 million to $70.49 million), covering unpaid consumption taxes, undeclared exported goods, late payment fees and other fees.
Even in the relatively affluent eastern province of Zhejiang, NingBo BoHui Chemical Technology said regional tax authorities in March ordered it to repay 300 million yuan ($42.3 million) in revised consumption taxes, as result of a “recategorization” of the aromatics-derivatives extraction equipment it had produced since July 2023.
Jiangsu, Shandong, Shanghai, and Zhejiang — some of China’s top provinces in tax and non-tax revenue generation — see non-tax revenue growth exceeding 15% year-on-year growth in the first half of 2024, S&P’s Huang said. “This reflects the government’s efforts to diversify its revenue streams, particularly as its other major sources of income face increasing challenges.”
The development has caused an uproar online and damaged already fragile business confidence. Since June…
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