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Local Government Fiscal Reform Key Outcome From Third Plenum

CHINA
  • President Xi has unveiled measures to curb the debt crisis that has crippled local governments in recent years.
  • Local governments have been left languishing with debt piles of CNY66 trillion
  • Xi has announced that more revenue will be allocated to the regional areas, away from central government. Since the tax reforms of the early 1990s, the level of tax revenues going to the regions versus central governments has declined significantly. This led to governments needing to sell land banks to developers which contributed to the issues today in the housing sector. Additionally local governments were forced to the bond market to raise capital to fund the shortfall, increasing debt burdens. Investors bought the local government bonds as quasi sovereign, with limited consideration for the underlying risks. As the debt levels got to a point of being unsustainable, investors started to differentiate between the local government issuers thus creating pricing differentials for their issuance
  • New measures will give local governments more autonomy and control over their housing markets in a bid to ease headwinds in this still under pressure part of the economy.
  • The measures include further support for subsidised housing and re-form of the pre-sale model to ensure developers can deliver houses already paid for by residents.
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