中国洞察：地方政府财政状况如何并不算坏

1、本文格式为word版，下载可任意编辑中国洞察：地方政府财政状况如何并不算坏 this content may not be distributed to mainland china u fiscal income received by local governments has suffered an unprecedented decline due to covid-19 u but funding from other sources, including the central government and local bond sales, is making up the sh

2、ortfall u while municipal bonds are ignored by foreign investors, we show why theyre important as they become too big to ignore 7 july 2021 a dent to the finances of local governments covid-19 has depleted chinas local governments of a key source of revenue. in the first five months of this year, lo

3、cal fiscal income which comes from taxes on the local economy dropped by 10.4% y-o-y. in hubei province, where wuhan is the capital, it fell by as much as 42% y-o-y. to make matters worse, spending by local governments is expected to rise, leading to a dramatic rise in their funding gap. all of this

4、 is important as local governments are a key part of chinas financial system given these entities have issued vast amounts of debt and fund all sorts of projects. strong support from the central government, but with conditions attached the good news is there is funding support from a variety of othe

5、r sources. transfer payments from the central government are rising, while local governments have been given the green light to issue more municipal bonds (munis). as a result, total cash inflows into local governments are expected to grow 9.1% this year, based on estimates by ministry of finance, n

6、ot bad at all. besides, the shadow fiscal system, operated through local government funding vehicles (lgfvs), has been on a fundraising spree in the first four months of this year. however, this time round, conditions have been put in place on local governments by the central government to reduce wa

7、steful investment and careless spending, a different tactic from the "all in' approach during the global financial crisis. munis: too big to ignore foreign investors often neglect munis, and for good reasons. they offer low spreads, poor liquidity and theres no rating differentiation. howev

8、er, munis have grown into the biggest bond class in the onshore market, and most importantly, banks have binged on them at the expense of credit bonds and policy bank bonds. we believe this trend will continue as the muni supply gets larger. that indicates credit bonds will be unable to rely so much

9、 on bank purchases, leaving asset managers to fill the void. moreover, if banks keep increasing their allocation to munis, they may ask for more compensation in the form of higher spreads. if that happens, then foreign investors may buy given the low risk, steady supply and long tenor. helen huang a

10、nalyst, fixed income the hongkong and shanghai banking corporation limited helendhuang.hk +852 2996 6585 disclosures amp; disclaimer this report must be read with the disclosures and the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it. issuer of rep

11、ort: the hongkong and shanghai banking corporation limited view hsbc global research at: china fixed income credit local governments financial health? not too bad china onshore insights fiscal incomes covid-19 crunch u an unprecedented drop in local fiscal income is being mitigated by a significant

12、step-up in payments from the central government u but this may not immediately translate into economic activity as theres tighter control on local governments over wasteful investment u munis have become the largest bond class in the onshore market but their impact is not yet fully appreciated this

13、report continues our deep dives into local government debt there is no doubt that the outbreak of covid-19 has badly hit a key source of revenue for local governments: fiscal income from the local economy. thats a potential worry as the financial health of local governments has major implications fo

14、r economic growth. these entities have issued large amounts of debt which fund all sorts of projects and are a critical part of the countrys credit system. in this report, we offer a comprehensive review of cash flow into local governments this year and conclude that the situation is not very bad, f

15、or now. this report also continues our previous analysis into this vital part of chinas financial system (see local government debt: the knowns and unknowns, 4 oct 2021 and local government debt: whats changed? 16 sep 2021). a rmb11.5trn problem one important source of revenue for local governments,

16、 and certainly the most straight-forward, is self-generated general fiscal income, which comes from taxes on the local economy. this dropped by 10.4% y-o-y in the first five months of this year, an unprecedented decline. normally it rises and did so even during the global financial crisis (fig 1). a

17、ccording to the national budget plan published in may, a decline of 3.5% is now expected for 2021. however, at the same time, local governments general fiscal spending is expected to increase by 4.2%. that means theres going to be a widening funding gap, which ministry of finance expects to reach as

18、 much as rmb11.5trn this year, a historic high (fig 2). on the face of it, this looks very worrying, though as we later explain, there are also reasons not to be overly concerned. 1. growth rate of local governments self-generated general fiscal income and general fiscal expenses 40.0% 30.0% 20.0% 1

19、0.0% 0.0% -10.0% -20.0% 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 local government self-generated general fiscal income, growth yoy local government general fiscal expenses, growth yoy source: wind, hsbc. data as of may 2021. 2. widening gap between local governments self-generated

20、 general fiscal income and general fiscal expenses 25,000 20,000 15,000 10,000 5,000 - 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021e local government self-generated general fiscal income, rmbbn local government general fiscal expenses, rmbbn source: wind, hsbc, ministry of financ

21、e estimates in provinces that were worst hit by the covid-19 outbreak, self-generated general fiscal income declined by even more. table 3 shows that in hubei province, where wuhan is the capital city, this metric dropped by as much as 42% y-o-y in the first five months of this year. as table 3 show

22、s, out of the 31 provinces, 18 reported double-digit declines in the first four months of this year, and the rest had either negative or flat growth. perhaps more worrying is that the covid-19 outbreak is not even the single biggest contributing factor to the recent decline in fiscal income. some pr

23、ovinces were already struggling with a decline in self-generated general fiscal income because the local economy was slowing and because of tax cuts. the virus has merely accelerated these existing trends. for example, in hubei province, growth in self-generated general fiscal income had remained in

24、 the low single digits from 2021 to 2021 before the outbreak. and in chongqing city, general fiscal income declined by 5.8% in 2021 and by 16.8% y-o-y in the first fourth months of 2021. rmbbn 3. growth of general fiscal income, by province, as of april 2021 provinces 2021, y-o-y jan april 2021, y-o

25、-y hubei 2.5% -43.7% hainan 8.2% -30.1% heilongjiang -1.6% -21.7% inner mongolia 10.9% -18.9% shanxi 2.4% -18.3% tianjin 14.4% -17.7% chongqing -5.8% -16.8% shaanxi 2.0% -16.0% jilin -10.0% -14.9% liaoning 1.4% -14.8% ningxia -4.7% -14.3% shanghai 0.8% -13.0% gansu -2.4% -12.8% beijing 0.5% -12.3% s

26、ichuan 4.1% -11.9% fujian 1.5% -11.6% xinjiang 3.0% -11.6% henan 7.4% -11.5% guangdong 4.5% -8.5% shandong 0.6% -8.5% hebei 6.5% -8.2% jiangsu 2.0% -7.8% guizhou 2.3% -7.7% hunan 5.1% -6.2% jiangxi 4.8% -4.2% zhejiang 6.8% -4.1% yunnan 4.0% -3.9% qinghai 3.4% -1.3% guangxi 7.8% -0.4% tibet -3.6% 0.4

27、% anhui 4.4% na all provinces* source: wind, hsbc 3.2% -11.5% note*: excluding anhui, which has not reported local fiscal income information this year. the resilience of this key metric has also varied widely by region. the coastal east region has fared relatively better in generating tax revenues a

28、t a local level than inland regions (see figure 4 below), thanks to its much larger and active private sector. this supports our argument made in the previous report that the virus outbreak has prompted beijing to increase the strategic importance of the private sector to help bring more stability t

29、o the economy (see our report default data what to watch for in a time of covid-19, 25 march 2021). 4. growth rate of self-generated general fiscal income, by regions, as of april 2021 10% 5% 0% -5% -10% -15% -20% middle northeast west east 2021 2021 2021 2021 april 2021 source: wind, hsbc note: mid

30、dle region excludes anhui province, which has not disclosed general fiscal revenue this year. middle region includes hubei province, where wuhan is capital city. payments from the central government is more stable however, all this is just one part of the story. investors shouldnt rush to a view abo

31、ut the financial health of local governments based just on this metric. over the past decade, the importance of self-generated general fiscal income has actually declined for local governments. its share of total cash inflow into local governments has declined from 46% in 2021 to 35% in 2021, and is

32、 expected to decline further to 31% this year, according to estimates by ministry of finance, as fig 5 shows. 5. breakdown of total cash inflows into local governments per year, 2021 to 2021e 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021

33、 2021e general fiscal income: self-generated general fiscal income: transferred from central gov gov fund income income from soe ownership net muni issuance source: wind, local governments, hsbc, ministry of finance estimates 0% 19% 0% 3% 2% 0% 2% 2% 3% 1% 6% 1% 22% 22 1% % 30% 26 % 22 22% 15% 1% %

34、28 27% 5% 31% 32 29 28% % 27% % 26 % 6% 47% 44 % 41% 44 % 46 % % 35 % % 31 % % % % % 4 38 41 39 43 42 44 % 27 % % % % % % 24 25 26 26 26 3 27 % % % % % % 28 26 0% 29 0% 30 % 119% 1% 1% 7% 2% 32 as chart 6 below shows, local governments fiscal book is split into two accounts: the general fiscal accou

35、nt and the government fund account, and each account collects revenue from different sources and conducts spending for different purposes. the most badly hit item self- generated general fiscal income is just one part of this sprawling funding system for local governments and does not tell the whole

36、 story. general fiscal account the general fiscal account collects revenue mainly from taxes on businesses and individuals. more than half the income under the general fiscal account is generated at a local level, referred to as self-generated general fiscal income, which as mentioned above declined

37、 by 10.4% y-o-y in the first five months of this year. but payments from the central government which also contribute to the general fiscal account is an important source too, as shows in item 1 in chart 6. the final source of cash for this account is from the issuance of general muni (municipal) bo

38、nds. appetite for these bonds rests on the ability of local governments to collect tax as well as payments into the general fiscal income account from the central government. money in the general fiscal account is spent on items like wages for government staff and subsidies for local schools and cor

39、porates. such spending is considered an "expense' because the spending will not form assets that can generate cash flow in the future. government fund account the other separate fiscal account is the government fund account. revenue under this account is collected mainly from land sales at

40、a local level. the central government has historically made very small transfer payments to local governments under this account. the remaining cash flow is provided by the issuance of project muni (municipal) bonds. appetite for these rests on local governments ability to sell land and to collect i

41、ncome from projects built by the proceeds of these bonds. funds from this account are spent on items like cleaning up a piece of land for auction, building a road or a utility plant. these items are considered "investments' because the spending will form assets that are able to generate cas

42、h flow in the future. theoretically, in rare situations where the government fund account dries up and attempts to refinance project muni bond fails, these bonds can default and local governments do not bear any obligation to use tax income in the general fiscal account to pay back bondholders of pr

43、oject munis. for this reason, the issuance of project munis is not counted in chinas official fiscal deficit. to be clear, only two types of bonds are counted: chinese government bonds (cgbs, though excluding special cgbs to be issued this year) and general munis. all three items marked in chart 6 a

44、re expected to be either stable or to grow significantly this year. they are a stable source of cash for local governments, especially now when self-generated general fiscal income faces challenges. we will discuss below these three items one by one. 6. structure of local governments fiscal accounts

45、, illustration local governments fiscal book source: ministry of finance, hsbc general fiscal account government fund account in coming out coming in coming out coming = = proceeds from issuance 3 of project muni central government 2 transfer payment from 2 self-generated government fund income (mai

46、nly from land sales) proceeds from issuance 3 of general muni 1 transfer payment of general fiscal income from central government self-generated general fiscal income (mainly from taxes) investment type of government spending expense type of government spending 1. transfer payment of general fiscal

47、income from the central government this is a mechanism whereby the ministry of finance collects revenues from local economies and then re-distributes it back to local governments. to be exact, vat, corporate income tax and individual income tax are collected from local economies and then split betwe

48、en local and central governments. the amount that goes into local governments become part of their self-generated general fiscal income, and the amount that goes into central governments are pooled together and then re-distributed to local governments. rich provinces are net payers and poor province

49、s are net receivers, making it an important channel for wealth redistribution in the country. transfer payments to local governments significantly increased in 2021 as the central government stepped up to support local governments to help them weather a reduction in tax revenue after a tax cut on co

50、rporates and individuals. this year, the ministry of finance will further increase transfer payments to local governments under this account by rmb950bn to rmb8.4trn (fig 7), representing a growth rate of 12.8% y-o-y. this extra money comes from the increased issuance of china government bonds (cgb)

51、. according to the budget plan published in may, the issuance quota of normal cgbs for this year is expanded by rmb950bn to rmb2.78trn, and all proceeds from this increase will be transferred to local governments general fiscal income. 7. transfer payment of general fiscal income from the central go

52、vernment 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021 2021e general fiscal income: transferred from central gov general fiscal income: transferred from central gov, growth yoy, rhs 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% source:

53、wind, ministry of finance, hsbc 2. government fund income as mentioned earlier, government fund income comes mainly from sales of local land to property developers. historically, the ministry of finance has made small transfer payments to local governments under this account. it also fluctuated a lo

54、t from year to year, depending on the sentiment of the property market. for this year, because of the slowdown in land sales, local governments self-generated government fund income declined 3.1% y-o-y in the first five months and is expected to decline 3.3% for the whole year, according to the budget plan published in may. the central government though is stepping in to support and make up the shortfall. it plans to make as much as rmb800bn of transfer payments this year to local governments under the government fund account