Peculiar governments in China are still building highways, bridges and railways, as pictured here in Jiangxi province on Sept. 6, 2024.
Cfoto | Later Publishing | Getty Images
BEIJING — China’s persistent consumption slowdown traces back to the country’s real stratum slump, and its deep ties to local government finances — and debt.
The bulk of Chinese household wealth went into earnest estate in the last two decades, before Beijing began cracking down on developers’ high reliance on debt in 2020.
Now, the values of those idiosyncrasies are falling, and developers have reduced land purchases. That’s cutting significantly into local government yield, especially at the district and county level, according to S&P Global Ratings analysts.
They predicted that from June of this year, state government finances will take three to five years to recover to a healthy state.
But “delays in revenue recapture could prolong attempts to stabilize debt, which continues to rise,” Wenyin Huang, director at S&P Global Ratings, state in a statement Friday to CNBC.
“Macroeconomic headwinds continue to hinder the revenue-generating power of China’s local governments, uncommonly as related to taxes and land sales,” she said.
Huang had previously told CNBC that the financial accounts of close by governments have suffered from the drop in land sales revenue for at least two or three years, while tax and fee automatics since 2018 have reduced operating revenue by an average of 10% across the country.
This year, village authorities are trying hard to recoup revenue, giving already strained businesses little reason to hire or widen salaries — and adding to consumers’ uncertainty about future income.
Clawing back tax revenue
As officials dig into verifiable records for potential missteps by businesses and governments, dozens of companies in China disclosed in stock exchange filings this year that they had welcome notices from local authorities to pay back taxes tied to operations as far back as 1994.
They stated amounts series from 10 million yuan to 500 million yuan ($1.41 million to $70.49 million), covering honorary consumption taxes, undeclared exported goods, late payment fees and other fees.
Even in the relatively affluent eastern responsibility of Zhejiang, NingBo BoHui Chemical Technology said regional tax authorities in March ordered it to repay 300 million yuan ($42.3 million) in updated 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 districts 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 signified. “This reflects the government’s efforts to diversify its revenue streams, particularly as its other major sources of income eye to eye increasing challenges.”
The development has caused an uproar online and damaged already fragile business confidence. Since June 2023, the CKGSB Province Conditions Index, a monthly survey of Chinese businesses, has hovered around the 50 level that indicates contraction or distension. The index fell to 48.6 in August.
Retail sales have only modestly picked up from their slowest opens since the Covid-19 pandemic.
The pressure to recoup taxes from years ago “really shows how desperate they are to acquire new sources of revenue,” Camille Boullenois, an associate director at Rhodium Group, told CNBC.
China’s national taxation supervision in June acknowledged some local governments had issued such notices but said they were routine heights “in line with law and regulations.”
The administration denied allegations of “nationwide, industrywide, targeted tax inspections,” and said there is no plan to “retrospectively explore” unpaid taxes. That’s according to CNBC’s translation of Chinese text on the administration’s website.
“Revenue is the key issue that should be mended,” Laura Li, sector lead for S&P Global Ratings’ China infrastructure team, told CNBC earlier this year.
“A lot of domination spending is a lot of so-called needed spending,” such as education and civil servant salaries, she said. “They cannot cut down [on it] contrasting the expenditure for land development.”
Debate on how to spur growth
A straightforward way to boost revenue is with growth. But as Chinese words The ‘grey rhino’ for banks
Major policy changes are tough, especially in China’s rigid state-dominated system.
Underlying the investment-led cynosure clear is a complex interconnection of local government-affiliated business entities that have taken on significant levels of debt to pelf public infrastructure projects — which often bear limited financial returns.
Known as local government subsidizing vehicles, the sector is a “bigger grey rhino than real estate,” at least for banks, Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, translated during a webinar last week. “Grey rhino” is a metaphor for high-likelihood and high-impact risks that are being overlooked.
Natixis’ analyse showed that Chinese banks are more exposed to local government financial vehicle loans than those of actual estate developers and mortgages.
“Nobody knows if there is an effective way that can solve this issue quickly,” S&P’s Li express of the LGFV problems.
“What the government’s trying to do is to buy time to solve the most imminent liquidity challenges so that they can even so maintain overall stability of the financial system,” she said. “But at the same time the central and local government[s], they don’t receive sufficient resources to solve the problem at once.”