Cash-strapped local governments look to boost funds

China’s cash-strapped local authorities are scrambling for ways to rebuild their fiscal firepower as a tax overhaul has seen them lose out to the central government and efforts to clear unsold apartments prompts many to restrict land sales for new development.
Proposals include turning over pension commitments to Beijing, redistributing sales-tax revenue from the central government to local coffers, or allowing provinces to start applying new levies on housing, according to proposals by former officials and tax experts in Beijing. The Ministry of Finance is in the midst of an overhaul of the nation’s tax system, with details on how local governments can boost revenue anticipated in coming weeks and months.
Meantime, the local economies hardest hit by revenue shortfalls are falling back on land sales to plug the gap, potentially worsening their long-term housing problems by adding to excess supply. The northeast rust-belt provinces of Heilongjiang, Liaoning and Jilin are most reliant on land sales, a Bloomberg provincial risk tracker shows.
The government has orchestrated a debt swap for local governments to convert expensive loans into bonds, with 5 trillion yuan (USD764 billion) of such borrowings maturing this year. Provincial authorities play a vital role sustaining China’s investment-led economy by helping fund infrastructure projects, and are an important backstop for consumption as the provider of pensions and welfare.
With local officials relying more on Beijing’s assistance, “their sense of uncertainty has grown, making them more reluctant to plan for long-term development of their local economies,” said Xu Shanda, former deputy director of the National Taxation Administration.
Still, regional and local governments’ fiscal and economic position improved in the first quarter and should continue to do so in coming quarters as the real estate market and macro economy stabilize, Moody’s Investors Service wrote in a report dated yesterday. Provinces heavily exposed to excess capacity industries such as steel and coal are lagging behind, it said. Bloomberg