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China faces a nearly $1 trillion funding gap. It will need more debt to fill it.


The first four months of this year saw a 2.7% drop in investment in real property development compared to a year earlier. This is an image of a Qingzhou project, Shandong Province, May 15, 2022.

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BEIJING — The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase of debt to fill the gap.

According to Ting Lu (chief China economist at Nomura), and his team, “The Omicron latest wave and widespread lockdowns since mid-March have caused a sharp contraction of government revenue including land sales revenue.” A report by last week was published.

They estimate a funding gap of about 6 trillion yuan ($895.52 billion) — roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production, and another 3.5 trillion yuan of lost land sales revenue.

The Nomura analysts stated that “Much” of the new’stimulus’ measures, whether they are special government bonds, or incremental lending from policy banks, would be used to simply fill the funding gap.

They expect the 3.5 trillion-yuan amount to be difficult to meet and have listed several options, including increasing borrowing or fiscal deposits, to compensate.

The April economic data showed a weakening of growth, as Covid controls had a major impact. Premier Li Keqiang said during a rare nationwide meetingLast week’s data showed that the problems in many areas were worse than those in 2020.

Even before this latest Covid pandemic, local revenue from land sales has plunged as a result of Beijing’s clampdown against real estate developers’ excessive reliance on loans. Beijing’s announcement to promote growth has been implemented in tax cuts and rebates by the local government.

Analysts from Japanese banks and other companies did not provide specific numbers on the amount of additional debt that might be required. They did however point to the growing demand for growth, which would need more debt support.

The Ministry of Finance stated that the local fiscal revenue increased by 5.4% over the previous year. This excludes tax refunds and tax cuts. The ministry reported that eight of China’s 31 provincial-level regions experienced a decline in their fiscal revenues during this period, but did not name them.

Wind Information did not have complete data. The regions of Qinghai and Shandong, Liaoning. Hebei, Guizhou. Hubei. Hunan. Tianjin saw a year-on-year decrease in their fiscal revenues for the first four month of the year. Tianjin posted the largest decline at 27%

According to Wind, Tibet saw a decrease in fiscal revenues only one province level.

Pinpoint Asset Management president Zhiwei Zhang stated that it is important to note that fiscal revenue declined in all areas, not just those under lockdown.

Zhang wrote in mid-May that Omicron infections had also affected many other cities, stating in an email: “Many of these cities are tied to those under lockdown.” It is not a problem that affects only a few cities.

Shenzhen sees fiscal revenue plunge

China sought to contain its worst Covid outbreak within two years in March. This was done by issuing stay-home instructions and travel restrictions in several parts of China.

Although financial data for Chinese cities isn’t easily available, Shenzhen, a southern tech hub, released numbers showing a 44% decrease in fiscal revenue year-on-year to 25.53 trillion yuan. This follows a decrease of 7% in fiscal revenue from March to 22.95 trillion yuan.

“The financial pressures on local government are increasing.” Zhang explained that while their expenditures rise, revenue drops. Zhang said that land sales have also fallen sharply. The central government might need to review its fiscal budget, and possibly issue additional debt in order to assist local governments.

In March, Beijing announced an increase of transfer funds from central governments to local governments. The Ministry of Finance responded to a May question by stating that some funds for next year will be transferred in advance of the time. This would help local governments receive tax cuts and refunds.

Spending on infrastructure is a pressing issue

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Jack Yuan, Moody’s Investors Service VP and Senior Analyst, stated that this year one result will be that less money will be available to support infrastructure.

According to him, land sales are an important source of local government infrastructure spending. A drop in land sales or a limited increase in special-purpose bonds could limit financing options for spending infrastructure.

Yuan noted, “We expect that the debt will continue climbing this year because of these economic pressures,” Yuan added. He also said it was still unclear how Beijing would balance economic growth and debt this year.