China property slump spurs local governments’ quest for cash

Cash-strapped and indebted, regional governments are seeking alternative revenue streams to compensate for falling land and tax income. That is a worrying sign that fiscal conditions are deteriorating, analysts say, and bodes ill for China’s sputtering economy.

For the first seven months of 2024, China’s tax revenue fell 5.4% on the year, reflecting continued economic malaise and tax cuts. Local government proceeds from land sales slid over 20%, Ministry of Finance data showed.

In contrast, China’s fiscal income from nontax items—including proceeds from state-owned assets sales, fines and confiscated property—jumped 12% during the period, with most going into local governments’ pockets. That compared with a 3.7% annual drop in 2023.

“The continued double-digit growth of nontax revenues suggests cash-depleted local governments may have sought to raise penalties, as they grapple with declining land sales revenue," Nomura economists said in a recent note.

In July, nontax revenue rose nearly 15% from a year ago, sustaining June’s double-digit pace of growth, Nomura calculated based on official data.

While nontax income offers relief for regional governments, economists warn it isn’t sustainable. And as it tends to be less transparent, could further erode already-weak consumer and business confidence.

One issue is poor data on sources of nontax revenue. This leaves room for speculation, especially amid a recent string of local news reports of instances in which authorities gave out big fines for minor infractions.

But there’s no consensus about what’s driving nontax revenues. Economists at Galaxy Securities said it is unlikely to be extra fines, noting that revenue from penalties typically makes up about 9% to 12% of China’s annual nontax income.

The major driver, some officials and economists say, is the monetizing of local government assets.

Since last summer, cities across China have been doubling down on selling and leasing out state assets—anything from unused buildings and parking lots to mineral reserves.

The strategy has proved particularly successful in wealthy areas like Jiangsu province, where it contributed the bulk of a roughly 30% surge in nontax revenue in January-May, official data showed.

“This follows the central government’s urging for local governments to address their debt burdens, even resorting to extreme measures like ‘selling everything to pay off debts,’ especially in regions facing high debt pressures," said Wenyin Huang, a director at S&P Global Ratings.

With traditional revenue sources untenable and newer ones uncertain, resolving the debt issue is a challenge.

A district government in Chongqing city caused a stir recently by setting up a task force to “smash iron pots and sell the steel"—a metaphor for disposing of its assets at all costs—to pay down debt.

It is unclear how many profitable assets local governments have left, and who’s buying them, some analysts say. In some cases, local administrations have been moving assets from one pocket to another, asking state-owned firms to buy up assets, recent government reports found.

Beijing seems to have taken note, with officials at high-level meetings renewing vows to help shoulder the fiscal burden.

Plans include boosting central government transfers to regional administrations, granting a larger share of consumption-tax revenue to local governments and letting them tax more items. But analysts say the plans lack detail, with scant progress made.

“Despite high market expectations for proactive fiscal support early this year, fiscal challenges appear more severe and persistent than previous years," Goldman Sachs analysts said in a note.

The dim economic situation complicates matters.

Arresting the property sales decline would revive local governments’ ability to generate revenue, S&P said in a report, but recovery also depends on pausing the expansion of fiscal-relief programs China has rolled out since 2018.

The programs, which entail progressively lower tax rates and tax refunds, among other things, have battered local governments’ self-generated operating revenues, S&P said. Without these, “revenue growth could have been much more robust across the board."

Macroeconomic headwinds hinder revenue-generating power, said S&P’s Huang, adding that “delays in revenue recovery could prolong attempts to stabilize debt, which continues to rise."

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