A housing market slump in China has hurt the finances of local governments, which are responsible for social spending. - AFP
BEIJING: A misuse of funds meant for meals for poor rural children in China has again highlighted the pressures that local governments face in servicing their debts, a persistent problem that has become more acute amid a slowing economy.
An audit report commissioned by China’s State Council – the country’s Cabinet – issued on June 25 found that 66 counties misused 1.95 billion yuan (US$264 million) meant for the programme between 2021 and August 2023 to pay back debts and cover other operational expenditures.
The meals programme was launched in 2011 by then Premier Wen Jiabao. It provided subsidies of 3 yuan a day for hundreds of millions of primary and secondary school students, with funds provided by the central government. The amount was raised to 5 yuan per student per day in 2021.
In China, mounting debt has led local governments to find ways to meet repayment demands, from cutting public spending to seeking overdue tax payments from businesses stretching back decades, as well as delaying wages for public workers and reducing medical benefits for the elderly.
Local debts have been chalking up, as China has long relied on government-led investments such as infrastructure, real estate and other projects for growth. While the central government is in charge of spending in sectors such as foreign affairs and defence, local governments are responsible for social spending in areas such as education and healthcare.
The debt problem has worsened in recent years. In 2022, tightening restrictions on property developers led to a housing slump, which in turn hurt local government revenues, as a significant proportion of that came from land and property-related taxes.
Over the past year, Beijing has vowed to get tough on runaway local debt, such as by tightening supervision over repayment plans and tackling implicit or “hidden” liabilities by swapping them with official bonds.
But the State Council report, submitted to China’s Parliament, the National People’s Congress, on June 25, found that local debt management remains “not strict enough”.
While audits of 19 provinces and municipalities found that debt risks were “generally manageable”, illegal lending and borrowing had not ceased completely and there has been an increase in delinquent accounts, said the annual report.
The report comes after a recent outcry over alleged “30-year retrospective tax investigations” in June, where several listed Chinese companies were asked to repay millions in taxes, raising questions about whether local governments were increasingly pressed and scrambling to find funds for tax payments.
A Jiangsu province-based F&B firm received a bill for overdue taxes of 85 million yuan dating back to 1994, while an oil production company in Zhejiang province was slapped with a 500 million yuan tax bill. Under Chinese law, in general, tax authorities can pursue tax recovery for up to five years, but there is no time limit if tax fraud or evasion was committed.
These cases sparked worries among the business community that the authorities were seeking to claw back taxes at a time of economic uncertainty. China’s national tax authority had to clarify on June 18 that there was no nationwide, coordinated campaign to retroactively investigate companies.
At the end of 2023, outstanding local government debt amounted to 40.74 trillion yuan, according to official figures. Other estimates, such as by measuring bond issuance, found that the figure was closer to 50 trillion yuan, which reflected a nearly 20-fold increase over the past decade.
All this is taking place amid a slowing economy. China’s economy, which grew by 5.2 per cent in 2023, is expected to slow to 5 per cent in 2024 and to 3.3 per cent by 2029, according to the International Monetary Fund.
Jonathan Elkobi, who is pursuing a PhD in political science at Yale University in the United States and has studied China’s local debt, said that one consequence of these debts is a decrease in public expenditure at the local level.
“Local governments are in charge of providing social and welfare services to the public, but the fiscal constraints do not allow them to spend as much as they would like on these services, especially during tight months,” he noted.
On the national level, local debts might lead to less sustainable growth as the central government needs to step in, for instance by issuing sovereign debt, Elkobi added.
Dr Yu Hong, a senior research fellow at the East Asian Institute in Singapore, said that local governments have been trying to develop new industries, such as in the electric vehicle, artificial intelligence and service sectors, to raise their incomes.
But doing so does not solve the debt problem directly, as they still need to secure loans for such expenditures, he said, adding that attracting foreign investments has also been difficult with the pessimistic outlook Western firms have towards China.
Fundamental reforms to redistribute revenues from the central to local governments are inevitable and long overdue, said Dr Yu, whose specialisations include regional economic development in China.
“The aim is to move local governments away from an over-reliance on land sales revenues, which are unstable and unsustainable.” - The Straits Times/ANN
