Chinese pensioners warned that they would come in large numbers. A week after a few small rallies, tens of thousands gathered on February 15 in Wuhan, in the center of the country, and in northeastern Dalian to protest against a reduction in their medical benefits. The seniors involved in this exceptionally large-scale protest came out to oppose cuts in the amount they are reimbursed by the social security system every month.
Elsewhere, civil servants have had their salaries cut, bus services have been reduced and this winter, heating has been rationed in northern cities. Companies have even been arbitrarily fined, to the point that Beijing has had to intervene in some municipalities. What connects all these events? A lack of funds for local government.
The cost of controlling the pandemic exploded in 2022, particularly because of mandatory PCR tests every two or three days in major cities. At the same time, tax revenues fell due to the slowing economy. In 2022, China's economy grew by 3%, barely better than in 2020, the year of the Covid-19 outbreak, when growth was 2.24%. These are the worst numbers in 40 years.
Projects that are often out of proportion
Another source of difficulty for local finances is the collapse of the real estate market. Until 2021, land sales to developers provided, on average, 40% of local government revenues. These fell by 30% in 2022. Under these conditions, one wonders how local governments, accustomed to sustaining growth through large infrastructure projects, will be able to do so in 2023. Yet most Chinese provinces have already published ambitious gross domestic product (GDP) growth targets of more than 5% for the current year.
Last year, China's total debt reached 295% of GDP, a record since 1995, according to a December 2022 estimate by the Bank for International Settlements. Local governments are the most impacted, accounting for about 90% of government spending. The situation is the result of very strict debt rules with untoward effects.
To circumvent these regulations, local governments have set up investment platforms (local government financing vehicles, LGFV) with non-transparent operations. As a result, in 2022, the total debt of cities and provinces increased by 15%. By 2023, local governments will have to repay 3,670 billion yuan (€499 billion) of debt, according to calculations by the Chinese data analysis company Wind.
'The key is really the recovery of the economy.'
Faced with this burden, the least developed provinces in the west of the country are having the most difficulty repaying debts they have issued to finance projects that are often out of proportion. In early 2022, the financing platform in the southern province of Guizhou had to ask Beijing for a rescheduling of payments. "Holders of private credit issued by LGFVs in similar regions, including bank loans, could face more restructuring risk," wrote US ratings agency Fitch on January 18. In the provinces of Sichuan, Jiangxi and Guangxi, financial pressure will increase due to falling tax revenues in 2022, said analysts at GF Securities, a Chinese investment fund.
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