China economy

Coal-rich Chinese city fails to pay civil servants as Xi Jinping’s reforms hit hard

Leiyang finance bureau says it has ‘serious shortage’ of cash but wages have now been paid to all staff – nearly a month late

PUBLISHED : Saturday, 09 June, 2018, 8:07am
UPDATED : Saturday, 09 June, 2018, 8:03am

Leiyang, a city of more than a million people in central China, failed to pay its civil servants last month after a significant dive in government revenues.

It is the latest local government to show signs of financial stress amid President Xi Jinping’s ongoing supply-side reform.

Last month, workers on the government payroll in the Hunan province city began worrying when their wages were not paid on the 15th of the month as usual. They still had not been paid at the start of June, prompting some employees to ask the authorities for an explanation via an online forum.

Leiyang’s finance bureau responded in a letter dated June 5, circulated online and confirmed by the South China Morning Post, that the city had a “serious shortage” of cash reserves to pay staff and the government’s fiscal deficit had been getting worse every year.

The letter said the bureau would ensure retired staff received any payments owed first and had asked the provincial authorities to transfer the funds needed to keep the government afloat.

When contacted by the Post, an officer at the bureau said salaries had been paid on Friday morning and should appear in the bank accounts of all staff early next week.

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Local governments across China are under growing pressure to generate enough revenues to cover their expenditure, as Beijing continues to chip away at income sources such as fees and taxes, and tightens the screws on polluting industries such as coal and steel.

The moves are part of supply-side structural reforms introduced by Xi in 2015 that include measures to deleverage the economy and cut excess capacity.

With a population of about 1.3 million people, Leiyang is rich in coal – the government has said it has 5.6 tonnes of recoverable reserves.

But while the provincial economy grew by 8 per cent last year – faster than the national average – Leiyang’s once lucrative coal industry has been shrinking since 2012. That has reduced administrative fees paid to the government by 1 billion yuan (US$156.4 million) – almost half the city’s total annual revenues in 2017 – in the past five years.

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The city’s revenues plunged by more than 18 per cent last year from 2016 to about 2.2 billion yuan, according to its annual report.

Its revenues for the year to May, about 800 million yuan, are already down 15 per cent from the same period a year ago.

Meanwhile across the province, profits were slashed by more than 70 per cent at major coal-fired electricity companies last year because of high coal prices after the authorities took measures to reduce overcapacity and cracked down on enforcement of environmental regulations.

Earlier this year, China cut its budget deficit ratio for the first time since 2012, to 2.6 per cent of gross domestic product. National government revenue growth is also expected to slow this year from 7.4 per cent to 6.1 per cent, while spending is projected to rise by 7.6 per cent from 2017.

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International rating agency Standard and Poor’s in March said local government financial gaps could expand from 8.7 per cent of China’s GDP in 2017 to 11 per cent this year, as their revenues are squeezed by cuts to taxes and fees and Beijing’s push for growth through public investment.