China faces a funding gap of nearly $1 trillion. It needs more debt to fill it.

In the first four months of this year, real estate development investment fell by 2.7% year-on-year. Pictured is a project in Qingzhou, Shandong province, on May 15, 2022.

Chief Financial Officer | Future Publishing | Getty Images

BEIJING — The Chinese government is facing a growing cash crunch as they expect to increase debt to fill the gap, analysts say.

“The latest wave of Omicron and the widespread lockdown implemented since mid-March has led to a sharp contraction in government revenue, including land sales,” Nomura chief China economist Lu Ting and a team said in a report last week.

They estimate the funding gap to be around 6 trillion yuan ($895.52 billion) — about 2.5 trillion yuan in revenue losses due to tax rebates and weak economic production, plus 3.5 trillion yuan in lost land sales.

“Many of the upcoming ‘stimulus measures’, whether special government bonds or incremental lending by policy banks, will be used only to fill this funding gap,” analysts at Nomura said.

It is their estimated figure of 3.5 trillion yuan that is difficult to fill, and they listed several measures, ranging from using fiscal deposits to increasing borrowing, that can be used to fill the gap.

Economic data for April showed weak growth as Covid containment took its toll.Premier Li Keqiang said at a rare national meeting In some ways, the difficulty is greater than in 2020, it said last week.

Even before the recent Covid-19 outbreak, land sales, an important source of local government revenue, had plummeted following Beijing’s crackdown on property developers’ high reliance on debt. Local governments are also responsible for implementing the tax cuts and rebates that Beijing has announced to support growth.

Analysts at the Japanese bank and other firms did not share specific figures on how much additional debt might be needed. But they pointed to growing pressure on growth and the need for more debt support.

Excluding tax cuts and rebates, the Ministry of Finance said that in the first four months of this year, local fiscal revenue rose 5.4 percent year-on-year. Eight of China’s 31 provincial-level regions experienced revenue declines during the period, the Commerce Ministry said, without naming them.

The current incomplete data from Wind Information shows that the fiscal revenue of Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan, Tianjin and other regions decreased year-on-year from January to April. Tianjin was the worst with a 27% drop.

According to Wande, in 2021, Tibet will be the only provincial-level region to experience a decline in fiscal revenue.

“It is worth noting that the decline in fiscal revenue is not only happening in lockdown cities,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.

“Many cities without the Omicron outbreak have also suffered because their economies are tied to cities currently under lockdown,” Zhang said in an email in mid-May. “The economic cost is not limited to a few cities, it’s a national problem.”

Shenzhen’s fiscal revenue plummeted

Infrastructure spending pressure

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“This year, one consequence will be less money for infrastructure spending,” Jack Yuan, vice president and senior analyst at Moody’s Investors Service, said in a phone interview earlier this month.

As land sales have been an important source of local government infrastructure spending, the decline in land sales and limited growth in special-purpose bonds will limit financing options for infrastructure spending, he said.

“Because of these economic pressures, we expect debt to continue to climb this year,” Yuan said, noting that it remains to be seen how Beijing decides how to balance economic growth with debt levels this year.