With traditional revenues under strain, local and regional governments (LRGs) in China will step up efforts to source alternative revenues. This will help at the margin but won't fully make up for the slide in traditional revenues such as those from land sales. Hence, funding for discretionary expenditures could be deprioritized--including some capital-intensive projects or fully settling certain payables.
Chart 1
What's Happening
Traditional sources of revenue continue to slide for China's local governments. We estimate that LRGs' taxes dropped by 3.5% year on year from January to August 2024. Land sales plummeted by 25% year on year over the same period. Governments are actively seeking alternative revenues.
Why It Matters
Spending cutbacks could reduce investments, payments and support to SOEs.
- As budgets tighten, governments will prioritize critical spending on social welfare, crucial public services, and meeting growing debt-servicing needs.
- This is given our view that the property downturn will continue to drag on confidence, consumption and overall economic growth. We recently revised down our GDP growth expectations for China to 4.6% for 2024 and 4.3% for 2025.
Delays in revenue recovery could also lengthen the path to better fiscal health and improved debt balances.
- Additionally, LRGs have a 2028 deadline to resolve "hidden debt"--LRGs' off-budget debt borne by SOEs. A smaller purse limits their ability to pay down such debt.
What Comes Next
LRGs will continue to seek to monetize different assets such as selling or renting out mining or concession rights or underutilized properties.
- As one example, fees and charges rose 27% year on year for Jiangsu province from January to May this year, with most of the increase from paid-use of state assets. On average, fees and charges accounted for about 10% of LRGs' total adjusted revenues as of end 2023.
- Chongqing municipality raised Chinese renminbi (RMB) 28.8 billion of funds in the first half, mainly from selling and leasing office buildings, parking lots, land plots, obsolete equipment, property operation franchises, and even fund shares. Buyers include asset management companies and SOEs; some private groups are also active in quality-asset transactions.
- The governments control vast resources. Official figures put the asset size of China's local-government owned SOEs at RMB230 trillion as at end-2022, so even tapping a small portion of this could make a difference.
Increased collection efforts could also help.
- For example, property taxes increased by 20% year on year nationwide from January to August, thanks to growing rental taxes following enhanced registration requirements on rental contracts. Likewise, urban land and farmland-use taxes rose 11% and 22%, respectively, due to strengthened collection management.
- Many LRGs have upgraded their reporting, recording, and reviewing systems for non-tax revenue, as well as intensified collection training for tax personnel. News reports even indicated that some LRGs have requested enterprises to pay back taxes dating to the 1990s. Though we think these are isolated cases and not advocated by the central government, it reflects the extent some governments will go to.
Hurdles stand in the way from tapping LRGs' assets and resources quickly and effectively. We think the alternative sources of revenue will only partially offset the gap.
- Concerns include the loss of control of state assets and the risks of corruption. Furthermore, as "better" assets are monetized sooner, it may become harder and harder to find a market for the remaining assets, particularly if they are mostly public service in nature and may not generate sufficient stable cash flows.
- LRGs have some room to raise revenues but can only do so incrementally as most major taxed items are under central governance. Despite the high growth of several property and land stock related taxes year to date, they accounted for less than 5% of LRGs' tax revenues. The total stock of assets under local SOEs may look big but may not be all that liquid.
Related Research
- Your Three Minutes In Chinese LRGs: Offshore Issuances Could Spark Credit Divergence, Aug. 22, 2024
- Is It Working? China's LGFV Debt De-Risk Program One Year On, July 25, 2024
- China's Local Governments: Capacity To Support SOEs Will Be Tighter For Longer, July 8, 2024
- China Local Governments: The Slow Road To Stabilization, June 13, 2024
- China LRGs: Recouping Revenue Is Key To Fiscal Sustainability, March 27, 2024
- SLIDES: China City Governments Risk Falling Into A Debt Trap, Feb. 20, 2024
- China's District And County Recovery Crimped By Property Slide And Debt Checks, Sept. 13, 2023
This report does not constitute a rating action.
| Primary Credit Analysts: | Wenyin Huang, Singapore +65 6216 1052; Wenyin.Huang@spglobal.com |
| Yunbang Xu, Hong Kong (852) 9860-4469; yunbang.xu@spglobal.com | |
| Secondary Contact: | Christopher Yip, Hong Kong + 852 2533 3593; christopher.yip@spglobal.com |
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