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MNI INTERVIEW: China Property Moves To Ease Local Debt Strains

MNI (Singapore)

China is likely to ease restrictions on property purchases to unlock demand from buyers of first homes and from people looking to upgrade following a call from the Politburo to revive the sector, a policy advisor told MNI, noting that such a move would bolster the finances of local governments under growing pressure from debt maturities.

The July 24 meeting by China’s top decision-making body flagged a “significant change in the property market’s supply and demand”, noting it would “adjust and optimise” policy in due course. Regulations which should be trimmed include controls on mortgages and the housing market in some tier-one and tier-two cities, said Jia Kang, former head at the Chinese Academy of Fiscal Science, a think tank affiliated with the Ministry of Finance.

“Considering the wide impact of the property sector to the whole economy, its performance and the relative policy easing are crucial to local government revenue,” said Jia, who now runs the China Academy of New Supply-side Economics, pointing to debts held by off-balance sheet local government funding vehicles in particular. Such vehicles have issued about CNY60 trillion in debt, with up to CNY18 trillion of this “hidden” debt directly owed by local governments.


While the Politburo said it will reveal “a basket of plans” to address local-government indebtedness, stoking expectations the central government may take on some of the burden itself, Jia thought authorities would rather boost local administrations’ revenue from land sales. Property income provides about 50% of local governments' comprehensive financial resources, former Vice Premier Liu He noted earlier this year.

“I do not think the central government will take over local hidden debt, which will damage the credibility of the government level-management system and the sustainability of government debt issue mechanism,” Jia insisted in an interview. “The principle of local debt disposal is clear that local governments will ‘take care of their own kids,’ in a bid to curb moral hazard.” (See MNI: China Seen Holding Off From Big Fiscal Stimulus)

Local governments could also take part of their off-book debt onto their own balance sheets according to the amended Budget Law, Jia said, though he noted that some are still illegally using vehicles to raise more funds. Administrations should also employ productive infrastructure funded by past bond issuance to raise revenues and also possibly sell corporate assets, he said, noting Guizhou Province raised about CNY70 billion from its share of state-owned liquor maker Maotai Group in 2019 to bail out its local government financing vehicle (LGFV).

Policy banks could also roll over loans and execute debt swaps, he added. However, asked about a report that Qingdao city would establish a fund to deal with hidden debt, Jia commented there were still technical barriers before this approach could be enacted on a large scale throughout the country.


The economist said China should aim to approach 6% GDP growth this year, and that this would be feasible with policies to support domestic demand. But weak private investment, which grew by only 0.6% y/y in H1, when overall fixed-asset investment expanded by 3.8%, is a worrying sign, he added, calling for authorities to quickly conclude a crackdown on large internet platforms, allowing companies to pay fines and move on to boost investor confidence.

The central government should also approve a basket of large private projects, to give a “green light” to investor confidence, he continued.


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