All but one of China’s provincial level governments ran deficit at start of 2019, raising further funding fears
- Shanghai was the only authority that ran a surplus financial position in the first six months of the year
- News follows takeover of Baoshang Bank and bailout of Bank of Jinzhou, leaving local governments and financial institutions in need of capital or even help from Beijing
Fears over China’s ability to manage its domestic economy alongside the trade war with the United States have further increased after 30 of the 31 provincial level governments are reported to have ran at a deficit in the first six months of 2019.
Shanghai was the only authority that ran a surplus financial position in the first six months of the year.
“We don’t expect a banking crisis, but see extensive recapitalisation and consolidation [of the banking sector] as inevitable,” said Diana Choyleva, chief economist of the London-based consultancy Enodo Economics.
We don’t expect a banking crisis, but see extensive recapitalisation and consolidation [of the banking sector] as inevitable
In addition, “debt as a share of [gross domestic product] is set to rise again, an unwelcome trend. China has scope for one more credit-driven stimulus, but that’s all – unless it fundamentally changes its economic model.”
It is common for some local authorities to report initial deficits under China’s fiscal system, in which Beijing takes the majority share of revenue and then remits funds to local governments to cover their deficits. But it is also an open secret that many have significant revenue shortfalls and large spending excesses due to tax cuts and infrastructure spending mandates from the central government.
These local governments are now scrambling for permission to issue new bonds and to take out new bank loans to fund industrial, infrastructure and social projects.