China stimulus struggles to take off amid debt, falling land sales
China’s efforts to jumpstart an economic revival are floundering under the weight of localgovernment debts and slumping land sales, putting pressure on policy- makers to unleash fresh stimulus measures.
With last week’s yuan devaluation roiling international markets and growth in domestic tax receipts slowing, Premier Li Keqiang will need to reach deeper into his tool kit to assure his 2015 economicexpansion target of around seven per cent.
Local governments alone face a debt- service burden of about 1 trillion yuan this year ( US$ 156 billion), according to JPMorgan Chase & Co. Revenue from land sales in the first seven months plunged 954 billion yuan from a year earlier, according to the government. Growth in fiscal revenue was 5.4 per cent in the first seven months compared with 8.5 per cent a year earlier using the same methodology, highlighting pressure on receipts.
“Local governments are facing a double whammy of interest payments up, and land revenues down,” said David Loevinger, a former China specialist at the U. S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles.
The fiscal drag, along with a continuing slowdown in credit expansion, “was one reason they let the exchange rate weaken,” Loevinger said.
The economy will need an additional 300 billion yuan to 400 billion yuan pumped in through government- run development banks, or other channels, to ensure the 2015 growth target, said Zhu Haibin, chief China economist at JPMorgan in Hong Kong.
That’s on top of the separate efforts to contain excess volatility in the stock market, which are confronting continued waves of selling.
The severity of the local- authority funding squeeze is especially acute in the northeastern province of Liaoning, where first- half revenue slumped 23 per cent, and this month it failed to sell bonds even with coupons 15 per cent higher than similar maturity sovereign debt.
Plummeting revenue from land sales is unlikely to change in the near future even though housing sales and prices are recovering in big cities, said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong.
Oversupply in small cities remains large, and property investment in small cities accounts for more than 70 per cent of total property investment, he said.