lo, did Beijing wave its magic wand, and there was much rejoicing!
economy grew 7.9 per cent faster in the second quarter of this year than it did
during the same period last year. That means GDP expanded by 7.1 per cent in the
first half and is now set to hit the government’s magic 8 per cent target for
massive fiscal and monetary stimulus appears a roaring success. The combination
of central government deficit spending and a tsunami of bank loans mean that the
total amount of extra cash pumped into the economy above a business-as-usual
scenario could be in the order of US$1,000bn this year alone.
paying for stimulus projects is putting strain on local finances. Only around 30
per cent of the stimulus cash will come from central coffers, with the rest
provided by local governments and companies, largely paid for by bank loans and
local governments and companies are finding it difficult to drum up the cash. A
May survey of 335 stimulus-related investments by the National Audit Office
found that local governments had stumped up less than half of their promised
funds, compared with a 94 per cent figure for the central government.
from bank loans, a large chunk of financing is meant to come from a new type of
local government bond. Since local governments are technically banned from
running budget deficits, the Ministry of Finance issues these bonds on local
initial Rmb200bn programme, which includes issuances on behalf of both provinces
and cities, is set to finish at the end of this month. Although the new bond
issuances are a huge step forward for local financing, they have two principal
poorer provinces may default on their bonds, leaving the central government to
pick up the bill. In this event, the central government may respond by
withholding fiscal transfers from central coffers.
the Rmb200bn programme is far too small to provide sufficient financing for
planned stimulus projects. For example, Guangdong only received a bond issue
quota for a paltry Rmb2bn-Rmb5bn, less than 10 percent of what it wanted.
governments, which have enormous expenditure requirements but scant budgetary
resources, look particularly vulnerable – especially as many already have
considerable hidden debts and liabilities.
the past decade, local governments have relied on land sales to fund investment.
But with land rapidly running out and stimulus spending adding to the pressure,
many are experiencing a funding squeeze.
world of local finance is deeply murky. Since local governments are technically
prohibited from borrowing, cities typically use quasi-legal Municipal
Development and Investment Companies (MDIC) to invest funds on the government’s
MDICs are government-owned, they operate outside the municipal budget. The
result is a tangle of grey financing that makes it impossible to establish the
true budgets and debt positions of city governments.
investment companies have recently been busy attempting to make up shortfalls by
issuing their own “hybrid municipal” bonds. According to the National
Development and Reform Commission, city-level investment companies tied to local
governments issued 46 municipal bonds in the year to June 1, raising
central government is betting that today’s spending will spur economic growth,
which will in turn generate tax revenues to pay the bill. But many city
governments will struggle to meet their stimulus commitments, and we can expect
defaults on municipal bonds.
provincial governments cannot pick up the tab, the central government will be
forced to do so.