Debt-laden local governments must get back to the basics of budgeting

Two pieces of recent news have piqued market interest. First, local governments have reported their latest debt statistics to the Ministry of Finance. The numbers have not been made public, but sources say many officials have reported large amounts, in an attempt to account for as much debt as possible. Second, in an attempt to revive the flagging property market, many local governments are easing requirements for the housing provident fund, which offers mortgages subsidised by the government. Some have also raised the loan-to-value ratio, extended the loan period and decreased the down-payment ratio for those buying their second property. These two pieces of news point to one conclusion: the good times are over for local governments. Despite the mismatch between government powers and their fiscal responsibility, local officials had nevertheless managed to keep their coffers flush with funds. While the economy grew at a breakneck speed, local government revenues increased at an even faster pace, often by 20-30 per cent and more - thanks in part to the pro-cyclical nature of the taxation system. Further, the property boom also allowed them to make record sums from the sale of land. Even in the throes of the global financial crisis, local governments' land revenues rose rather than decreased. Using land as collateral, they were also able to borrow substantial sums from banks. Inevitably, such exponential growth cannot be sustained, as the factors that enabled it began to weaken. For one, the Chinese economy is in the midst of transition, and the pace of growth has slowed. Thus, so have government revenues. According to the finance ministry, in the first 11 months of 2014, local government revenues increased by 6.4 per cent year on year - slower even than the growth in gross domestic product, a first in many years. Separately, many provincial and regional governments have reported that their fiscal income last year grew at a slower pace than previously, with most falling between 7 to 8 per cent. The slowdown is especially noticeable in provinces boasting rich resources or traditional industries. Besides, the property market is unquestionably cooling down, and local governments can no longer rely on land sales to keep themselves afloat. Changing demographics are affecting the dynamics of housing demand and supply. Coupled with the government's cooling measures, these factors have left China's property market languishing. Even the new rules to ease eligibility for a second property and lower the interest rates have only boosted the number of transactions, while prices have remained indifferent. In some second- and third-tier cities, they have even fallen. Land sale revenues are set to drop. According to Deutsche Bank, China's middling housing market will hit fiscal revenues hard this year. Though the warning that China was facing the worst fiscal crisis of the past three decades may be overly pessimistic, government officials at all levels would do well to pay attention. No doubt the central government's determination to improve management of local government debt has piled pressure on local officials, for now at least, to keep solvent. Last October, the State Council released its guidelines on local government that stressed Beijing would not bail out those that failed to repay their debts. Soon after, the National Development and Reform Commission, the finance ministry and the China Securities Depository and Clearing Corporation separately outlined new measures to strengthen debt oversight and improve risk management, as well as streamline the relationship between business and government. In this period of transition, local governments' ability to raise funds will be curbed. Local governments play a key role in the success of Chinese reforms. If local government coffers are lean, ordinary Chinese will be the worse for it. To improve their financial situation, local officials must stick to the two basics of fiscal budgeting: find new streams of revenue and keep spending to a minimum. The first should not mean adding to the financial burden of companies and the people, nor should it be done through "innovative" financial products cooked up for profiteering. Instead, local governments should initiate changes in line with the broad strokes of China's fiscal reform, by gradually raising taxes on state-owned capital, rationalising their budgets and ensuring more efficient use of government funds. As for the second, to curb spending, officials should continue to heed the directive from the top to cut their spending on international travel, entertainment and vehicle purchases. To root out the problem of extravagance, there must be fundamental changes to how governments manage their budgets.

Debt-laden local governments must get back to the basics of budgeting

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Hu Shuli says local officials under pressure from Beijing to keep afloat need to curb their spending excesses and find new streams of revenue

Hu Shuli says local officials under pressure from Beijing to keep afloat need to curb their spending excesses and find new streams of revenue