China’s efforts to jump-start an economic revival are floundering under the weight of local-government debts and slumping land sales, putting pressure on policy makers to unleash fresh stimulus measures.
With last week’s yuan devaluation roiling international markets and growth in domestic tax receipts slowing, Premier Li Keqiang will need to reach deeper into his toolkit to assure his 2015 economic-expansion target of around 7 percent.
Local governments alone face a debt-service burden of about 1 trillion yuan this year ($156 billion), according to JPMorgan Chase & Co. Revenue from land sales in the first seven months plunged 954 billion yuan from a year earlier, according to the government. Growth in fiscal revenue was 5.4 percent in the first seven months compared with 8.5 percent a year earlier using the same methodology, highlighting pressure on receipts.
“Local governments are facing a double whammy of interest payments up, and land revenues down,” said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. The fiscal drag, along with a continuing slowdown in credit expansion, “was one reason they let the exchange rate weaken,” he said.
The economy will need an additional 300 billion yuan to 400 billion yuan pumped in through government-run development banks, or other channels, to ensure the 2015 growth target, said Zhu Haibin, chief China economist at JPMorgan in Hong Kong.
That’s on top of the separate efforts to contain excess volatility in the stock market, which are confronting continued waves of selling. Chinese stocks tumbled on Tuesday, with the Shanghai Composite Index losing 6.2 percent.
The severity of the local-authority funding squeeze is especially acute in the northeastern province of Liaoning, where first-half revenue slumped 23 percent, and this month it failed to sell bonds even with coupons 15 percent higher than similar maturity sovereign debt.
“With the decline in land sales in all but a small handful of cities, many localities will have problems servicing debt, much less to finance new construction projects,” said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance.
While the central government has put in place a program to swap higher-interest local debt with longer-maturity, lower-cost bonds, that initiative won’t help every region, according to Shih. It “will mainly favor provincial capitals and major cities, leaving smaller cities in deep fiscal distress,” he said.
Other measures already in train to combat the fiscal drag include allowing banks to restart lending to provincial financing vehicles after an earlier ban, and expanding the capacity of government-run policy banks to lend for projects such as shantytown redevelopment.
Meantime, the move earlier this month to let the yuan slide -- part of a broader campaign to let market forces play a bigger role -- may have a limited impact on growth. A 3 percent to 4 percent depreciation in the yuan is helpful to mitigate pressure on the export sector, but it’s not enough on its own to offset other drags on the economy, JPMorgan’s Zhu said.
A property-market slump, along with its knock-on effect on industry and mining, is subtracting about 1.5 percentage points from gross domestic product this year, estimates Wang Tao, a China economist with UBS Group AG in Hong Kong.
With infrastructure spending capacity constrained, data released last week showed that fixed-asset investment for the first seven months of 2015 rose by the least since 2000.
Plummeting revenue from land sales is unlikely to change in the near future even though housing sales and prices are recovering in big cities, said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. Oversupply in small cities remains large, and property investment in small cities accounts for more than 70 percent of total property investment, he said.
The recent increase in debt sales by provincial financing vehicles “reflects the government’s determination to support the economy,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a note. It also shows authorities in Beijing are prioritizing efforts to smooth out the investment bottleneck that resulted from earlier restrictions on local governments’ ability to raise funds.
“While fiscal budgetary reform could help improve both the transparency and accountability of local government finances, it also requires careful implementation to avoid damping China’s growth momentum,” he wrote.