A vice mayor of a northern city in the mainland was blocked on his way out of the office by some angry contractors after the municipal government defaulted on the payment for an expressway project earlier this year, Xinhua News Agency’s Economic Information Daily reported.
The funny thing is that instead of summoning security staff, the official took the project managers to the city’s financial bureau and showed them accounting books to prove that the government is indeed out of funds because of the heavy spending on infrastructure projects.
Although the report did not disclose any more details, it is believed that the city is Shenyang, capital of the northeastern Liaoning province.
The city kicked off a slew of urban projects in 2012 worth 400 billion yuan (US$64.95 billion). But its fiscal revenue last year was just 80.1 billion yuan.
Other reports said the city’s public utility firm stopped water supply to some areas when the government ceased direct subsidies and local officials had to hire fire trucks to supply water to affected residents.
For a long time there have been conflicting views about the financial standing of China’s local governments.
Optimistic observers, best represented by well-known economist Justin Lin Yifu – one of Premier Li Keqiang’s top advisers – say one should not read too much into the problem as with a 50 percent savings rate and massive foreign exchange reserves, Beijing has enough room to maneuver.
But the above example provides a glimpse about the actual situation on the ground.
Caution is indeed warranted with figures from the National Audit Office (NAO). Its nationwide survey last June revealed that the country’s provincial (including all 22 provinces, five autonomous regions and four provincial-level municipalities), prefectural and county-level governments had debts and liabilities worth 10.9 trillion yuan and up to 22 percent, or 2.4 trillion yuan, will mature by the year end.
Vice Financial Minister Wang Baoan told Xinhua that 2014 could be the most difficult year for some local officials as they may have to grapple with the mounting pressure to meet their debt obligations.
Naturally, one old approach is to borrow more to pay back maturing debts. Nine provincial authorities have resorted to borrowings of up to 60 billion yuan during the past nine months ended this March, according to People’s Daily.
China Merchants Securities estimates that excluding non-operational assets, the gearing ratio of all provincial, prefectural and county-level governments stood at 73.6 percent at the end of 2012.
The brokerage warns that given the prevailing interest rates over the recent years, local governments will have to pay no less than 1 trillion yuan a year as loan interest.
There is no doubt local cadres hinge fiscal revenues on just a few things – land sales, taxation and levies as well as various financing vehicles.
The NAO says 11 provinces, 316 prefectural-level cities and 1,396 counties nationwide use land sales income – or even land yet to be auctioned – as collateral for their debts totaling 3.5 trillion yuan by the end of 2013.
That can be all right when the property sector was at its height back then, but it’s safe to say cadres now have more to worry about as developers take time to buy plots in the currently less vibrant market.
There is no official figure on land sales income but research firm China Index Academy puts that number for 300 cities at a combined 1.24 trillion yuan during the first half this year, barely up 0.1 percent from a year ago. And June’s figure was a year-on-year plunge of 33 percent at 157.2 billion yuan.
This can stir some real jitters when the pillar source of income is in deep peril. That also explains the recent race by local authorities to loosen or lift restrictions on home purchases by non-local homebuyers.
With the dimmer prospects of the property sector, banks, which were once quite obliging thanks to the guarantee of land income for loans they issue to local cadres, now opt to stay on the sidelines and tighten rules on new loans amid the banking watchdog’s repeated calls for caution.
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