Local governments are dragging on economic growth
According to one of China’s most influential policy advisors, local governments have become a drag on the economy.
In a recent speech, Huang Yiping, dean of an economic think tank at Peking University and academic member of the central bank’s (PBoC) Monetary Policy Committee, said local governments are eroding business confidence and undermining growth in their attempts to balance their books.
- See our profile of Huang here.
ICYDK: The collapse in land sales since 2021 has significantly reduce local government revenue, which has been further eroded by declining property-related taxes.
Huang said that, in response, local governments have cut costs by trimming spending on public services and reducing salaries.
- They’re also seeking out “irregular” sources of new income.
Some context: Huang didn’t say what those sources were, but there are widespread accounts of local authorities pursuing companies for back taxes – real and imagined – and levying arbitrary fees and fines.
Huang said that local governments used to amplify Beijing’s stimulus efforts, such as in 2009 when the central government’s RMB 4 trillion stimulus package was augmented by local government borrowing.
- Now local authorities weaken stimulus efforts.
The solution? Huang argues that next year Beijing should ramp up central fiscal support to counteract local governments’ contractionary impact on the economy.
Get smart: We’ve long argued local governments are engaged in austerity policies, and that economic recovery requires plugging their financial shortfall.
Get smarter: Such a rescue would look remarkably like a wholesale bailout – something Beijing adamantly refuses to consider, at least for now.
Our take: Local austerity will continue until and unless Beijing steps in more forcefully.