One of the big outcomes of the political meeting in Beijing last week was a decision to have the central government spend more to reduce the burden on cash-strapped local governments.
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It’s unclear yet exactly how that’s going to work, but at least it’s likely to involve a change to how taxes are levied and where the money goes, and may include more debt issuance to pay for spending.The thousands of provinces, cities, counties and towns across the nation need help. Their combined budget deficit last year was a record 15 trillion yuan and it’s looking only a little smaller so far this year.
Those LGFVs took on lots of debt to pay for construction and projects that local governments couldn’t fund from their official budgets, but many are now struggling to repay that as land prices drop and consumption growth stay weak. There was an estimated 66 trillion yuan worth of such debt this year, according to the International Monetary Fund, almost as much as all the official debt owed by the central and local governments.Another problem is that China isn’t a very high-taxing country.
That would put their finances on a more stable footing, but Beijing has never found the right time to extend the ongoing trial nationwide. It is unlikely to happen anytime soon as home prices have been falling for years and a tax on the value of houses would likely accelerate that.
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