China faces a financing gap of nearly $1 trillion. It will take more debt to fill it.

During the first four months of the year, investment in real estate development fell by 2.7% compared to a year ago. Pictured here is a project in Qingzhou, Shandong Province, on May 15, 2022.

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BEIJING — The Chinese government faces a growing cash shortage, analysts say, as they forecast an increase in debt to fill the gap.

“The latest wave of Omicron and the widespread lockdowns in place since mid-March have led to a sharp contraction in government revenues, including revenues from land sales,” said Ting Lu, China chief economist at Nomura, and a team last week in a report. †

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

“Many of the incoming ‘stimulus’ measures, whether special government bonds or incremental loans by policy banks, will only be used to fill this funding gap,” the Nomura analysts said.

It is that figure of 3.5 trillion yuan that they expect will be difficult to fill, and they listed various measures, from using tax deposits to increasing loans, which could be used to fill the shortfall. to fill.

Economic data for April showed weakening growth as Covid controls took their toll. Prime Minister Li Keqiang said at a rare nationwide meeting last week that the difficulties were in some ways greater than they were in 2020.

Even before the latest Covid outbreak, land sales, a major source of local government revenue, have fallen following Beijing’s crackdown on real estate developers’ heavy reliance on debt. Local governments are also responsible for implementing tax cuts and refunds that Beijing has announced to support growth.

The Bank of Japan and analysts from other companies did not share specific figures on how much additional debt might be needed. But they pointed to mounting pressures on growth that would require more debt support.

Excluding tax cuts and refunds, the Treasury Department said local tax revenues were up 5.4% in the first four months of the year from a year ago. Eight of China’s 31 provincial-level regions saw a decline in tax revenues during that time, the ministry said, without naming them.

Incomplete data for the Wind Information period showed that Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin regions posted year-over-year declines in tax revenues for the first four months of the year. Tianjin was the worst with a 27% drop.

According to Wind, Tibet was the only county-level region in 2021 where tax revenues fell.

It’s “important to note that the decline in tax revenues didn’t just happen in locked-down cities,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.

“Many cities without Omicron outbreaks have also suffered, as their economies are linked to the cities that are currently being shut down,” Zhang said in an email in mid-May. “The economic cost is not limited to a small number of cities, it is a national problem.”

Shenzhen sees tax revenue falling

Since March, mainland China has tried to contain the worst Covid outbreak in two years with stay-at-home orders and travel restrictions in many parts of the country, most notably Shanghai and the surrounding region.

While financial data for many Chinese cities is not readily available, Shenzhen’s southern tech center has released figures showing a 44% year-over-year decline in tax revenue in April to 25.53 billion yuan. That followed a 7% year-on-year decline in March to 22.95 billion yuan.

“Local governments are facing increasing fiscal pressures. Their spending is rising, but revenues are falling,” Zhang said. “Land sales have also fallen sharply. I think the central government may need to revise the fiscal budget and spend more debt to help local governments.”

Beijing already announced an increase in remittances from central to local governments in March. When asked in May whether that would be expanded, the Treasury Department noted that some of next year’s funding would be transferred in advance to help local governments with tax refunds and cuts this year.

Pressure to spend on infrastructure

For Susan Chu, senior director at S&P Global Ratings, she’s more concerned about the deficit, the drop in revenues versus spending. Land sales are not putting pressure on the deficit, she said, noting that “there will be more pressure from infrastructure spending and tax cut allocations.”

A “growing deficit means there is a chance of more loans or debt in the future,” Chu said in a telephone interview earlier this month. While she doesn’t expect out-of-budget loans to bounce back, she said it’s an important signal to watch out for when assessing risk.

In late April, Chinese President Xi Jinping called for a nationwide push to develop infrastructure ranging from waterways to cloud computing infrastructure. It was not clear on what scale or in what time frame the projects would be built.

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“This year will be a result of less money left over for infrastructure spending,” Jack Yuan, VP and senior analyst at Moody’s Investors Service, said in a telephone interview earlier this month.

He said that since land sales have been a major source of local government spending on infrastructure, a decline in land sales and a limited increase in special-purpose bonds would limit financing options for infrastructure spending.

“We expect debt to continue rising this year as a result of these economic pressures,” Yuan said.

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