Government must bite the bullet

The accelerated efforts for funds rebalancing to be expected within the country's banking system will possibly expose its hidden local debt risks at an earlier date. There have been concerns over its accumulated local debt risks since 2009. Due to strengthened efforts from the authorities to tighten bank loans since the start of 2012, many of the country's local financing platforms have begun to turn to trust loans and other financing forms in an attempt to borrow new money to pay off old debts, which has to some extent eased their debt-paying pressures.

However, the tightened flow of credit and trust funds to local financing platforms pushed by commercial banks following the recent liquidity crunch will inevitably aggravate short-term local debt risks. Due to their desire not to default on their debts borrowed via their financing vehicles for the sake of continuous financing in the future, local governments will possibly use some of their fiscal revenues to pay off debts, thus adding to their fiscal crisis.

The assets restructuring pushed by domestic commercial banks will negatively affect credit-driven real estate development and thus indirectly influence local fiscal revenue. A large-scale flow of funds to the property sector in recent years has continuously fueled the rise of property prices, benefiting both banks and developers. At the same time, the ever-bulging revenues from land sales and tax have also made local governments become the largest beneficiary of the real estate-dependent economic model.

The unavoidable deleverage for interbank financial and trust products following the recent liquidity crunch will inevitably reduce the funds for real estate development and thus dampen developers' enthusiasm for buying land, which will result in a decline in local land sales revenues. Money insufficiency will also foil local governments' hopes of utilizing an easy monetary policy to stimulate local economic growth and boost their fiscal revenues.

Compared with its flat purses, the country's fiscal spending has kept rocketing both at the central and local levels. In the first five months, outlays at the expense of public coffers amounted to 4.66 trillion yuan, a 13.2 percent increase from the same period last year, or 7.1 percentage points higher than the country's fiscal revenue growth.

Facing growing fiscal pressures in the context of a "money shortage" and financial and tax reforms, the government should realize that low fiscal revenue growth will be common in the future and that preparations should be made for fiscal austerity.

The government should further reduce its administrative costs and improve its administration efficiency through delegating more power to lower departments and promoting government restructuring to reduce interventions into microeconomic activities. The awareness that it should live within its fiscal capacity should be cultivated to avoid excessive spending.

Zhao Xiao is a professor with the School of Economics and Management, Beijing University of Science and Technology, and Chen Jinbao is an economics PhD at the school.

(China Daily 07/11/2013 page8)