BEIJING – China’s attempts to stamp out Covid-19 are draining local-government coffers, posing a fresh threat to the economy and bond investors as President Xi Jinping doubles down on his zero-tolerance stance toward the virus.
Jilin province, in the north-east of the country, has warned of “increasingly outstanding conflicts” between spending and income.
Finances at almost half of of its 60 county and district level governments are so tight they are exposed to “operational risks”, the provincial finance department said in its first-half budget execution report released last month.
All 31 provincial regions in China – with the exception of Shanghai – logged a deficit in the first seven months of the year.
Authorities handed out trillions of yuan in tax breaks to support businesses amid the economic slowdown, as well as covered the cost of Covid Zero policies, such as mass-testing and restricting the movement of residents.
Plunging land sales are adding to the squeeze by cutting a key funding source.
Pressure on local government finances is likely to intensify as the Communist Party steps up Covid-19-fighting efforts before the twice-a-decade congress.
Health officials this month announced a raft of measures that will be in place until the end of October, including asking local governments to test residents regularly, regardless of infection levels.
Lockdowns are happening with rising frequency, with Chengdu, the country’s sixth-largest city with 21 million people, being one of the most recent.
The result is municipal governments are seeking to cut spending where they can. Government employees in coastal regions have had their income slashed as bonuses and subsidies were scrapped, according to local media reports.
Covid-19 testing providers are finding it increasingly hard to get paid for their services, with some warning of the growing risk of bad debt.
“If fiscal income can’t rebound in the second half of the year, spending must be reduced as the budget deficit can’t be exceeded,” said Mr Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered.
“Slower fiscal spending than in the first half of the year would certainly be a drag on the economy.”
Constraints on provincial spending could impede stimulus efforts for an economy that’s struggling amid the Covid=-19 restrictions and property weakness.
Official data Friday showed a slight improvement in the economy’s recovery, although it remains fragile and susceptible to lockdowns and turmoil in the housing market.