After the boom: how China’s local governments pay the bills

Alicia, I see you're nodding.

Do you want to add anything here?

Yeah, because Kelly nailed it.

So that's why I was noting and, you know, thinking what kind of revenue could we find? I can only think of additional expenses.

That's the problem.

Because think about the underfunded pension system, which local governments will have to provide for.

A bunch of contingent liabilities.

Think about, you know, the health care as China ages.

So in a way, this is becoming really urgent.

I say this because for some, you know, this is just a temporary problem.

At some point, the real estate sector will button up and there will be land to sell.

And I think that's too optimistic because the expenditure, I mean, the contingency will grow.

So you need to think of a permanent solution here.

Of course, the question is, why would the government not perhaps hand out more revenue in the sense ability to raise revenue to the local government? So more decentralization of the revenue.

I think that could be a solution.

But again, the reality is that when you look at one specific tax, which is the tax on labor, which comes now very handy because of the issue of very fast AI adoption in China and what it means for labor displacement.

Actually, we need to reduce the very heavy burden for China's income per capita, actually probably among the highest in the world when it comes to labor taxes borne by companies.

So if anything, I really think that there is an urgent need to kind of divide the pie, yeah, it's like make local governments raise more taxes.

And if anything, ask the central government with much more capacity to issue at very low rates, 170 something, I mean, very, very low, to raise more.

With that very low interest payments, Etienne, you surely can correct me, but I somehow heard today at this conference that we were discussing before, that the actual debt service for local governments is something that getting close to 20 per their expenditure.

I don't know whether this is right or wrong, but it sounds like a lot really.

And I wonder whether that could be passed on to the issuer that can issue at the lowest cost probably, you know, across the board, not only in China, but globally by now.

I mean, so why not share more burden by the central government and give the local governments more revenue power? That's for me the key question here.

Totally agree with Alicia.

My own calculation is that on-budget debt service as a share of local governments consolidate their revenue with land development costs removed and social insurance budget revenue removed, reach something like over 45% at the end of 2023.

Alicia, I see you're nodding.

Do you want to add anything here?

Yeah, because Kelly nailed it.

So that's why I was noting and, you know, thinking what kind of revenue could we find? I can only think of additional expenses.

That's the problem.

Because think about the underfunded pension system, which local governments will have to provide for.

A bunch of contingent liabilities.

Think about, you know, the health care as China ages.

So in a way, this is becoming really urgent.

I say this because for some, you know, this is just a temporary problem.

At some point, the real estate sector will button up and there will be land to sell.

And I think that's too optimistic because the expenditure, I mean, the contingency will grow.

So you need to think of a permanent solution here.

Of course, the question is, why would the government not perhaps hand out more revenue in the sense ability to raise revenue to the local government? So more decentralization of the revenue.

I think that could be a solution.

But again, the reality is that when you look at one specific tax, which is the tax on labor, which comes now very handy because of the issue of very fast AI adoption in China and what it means for labor displacement.

Actually, we need to reduce the very heavy burden for China's income per capita, actually probably among the highest in the world when it comes to labor taxes borne by companies.

So if anything, I really think that there is an urgent need to kind of divide the pie, yeah, it's like make local governments raise more taxes.

And if anything, ask the central government with much more capacity to issue at very low rates, 170 something, I mean, very, very low, to raise more.

With that very low interest payments, Etienne, you surely can correct me, but I somehow heard today at this conference that we were discussing before, that the actual debt service for local governments is something that getting close to 20 per their expenditure.

I don't know whether this is right or wrong, but it sounds like a lot really.

And I wonder whether that could be passed on to the issuer that can issue at the lowest cost probably, you know, across the board, not only in China, but globally by now.

I mean, so why not share more burden by the central government and give the local governments more revenue power? That's for me the key question here.

Totally agree with Alicia.

My own calculation is that on-budget debt service as a share of local governments consolidate their revenue with land development costs removed and social insurance budget revenue removed, reach something like over 45% at the end of 2023.