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tencent news "periscope"

author: feng biao editor: liu peng

recently, local governments such as chongqing and inner mongolia have set up special working groups to promote the resolution of local debts, which has attracted attention.

in fact, preventing and resolving local debt risks has been one of the important tasks of some local governments in recent years. the local debt data released by the ministry of finance showed that as of the end of june 2024, the national local government debt balance was 42609.8 billion yuan, while the national local government debt balance was 37799.9 billion yuan in june last year.

tencent news' qianwang interviewed zhao jian, president of xijing research institute, on the current hot issues of resolving local debts and how to effectively implement proactive fiscal policies. he believes that the pressure of resolving local debts this year mainly comes from cash flow pressure caused by the reduction of land transfer fees and bond issuance.

in zhao jian's view, although there is pressure to resolve debt, the ultimate goal is not to resolve the debt, but to develop the entire economy. only economic growth can resolve debt pressure. therefore, zhao jian believes that local governments should not over-exaggerate the tight schedule, but still need to focus on promoting economic growth. in addition, he also suggested that the central government increase financial support in the field of people's livelihood to boost confidence.

the following is the full text of the conversation with zhao jian:

periscope: the resolution of local debt has been going on for several years. what do you think is the root cause of the problem?

zhao jian：local debt is closely linked to the real estate situation. the downturn in real estate has put pressure on local government land finance and land finance. land finance is essentially municipal investment bonds.

the current pressure on local governments to resolve local debts is a concentrated outbreak of contradictions accumulated over the past few decades. after the us subprime mortgage crisis in 2008, external demand decreased and domestic demand needed to be restarted. the main way was for local governments to sell land, real estate developers to develop land into houses, and residents to borrow money from banks to buy houses. in this process, local governments are development-oriented and construction-oriented governments. they rely on funds from land sales to carry out infrastructure construction and increase public services such as schools and hospitals, thereby achieving rapid urbanization and economic growth.

but at the same time, a large amount of debt has accumulated behind this process. in the past, we did not feel the pressure of debt because the real estate industry was in an upward cycle. but now the real estate industry is in a downward cycle, and the central government requires local governments to change their development model and change their original debt-based finances, which has put pressure on the cash flow of local governments, thus putting pressure on debt resolution.

periscope: governments in many places have set up special working groups to promote the resolution of local debt. in your opinion, where do you think the current pressures mainly lie?

zhao jian: i think the greater pressure facing local governments this year is that both land transfer fee income and the issuance of local bonds are lower than expected.

data from the ministry of finance show that from january to july this year, local government fund budget revenue at the local level was 2090.9 billion yuan, a year-on-year decrease of 20.7%, of which the revenue from the transfer of state-owned land use rights was 1776.3 billion yuan, a year-on-year decrease of 22.3%. in terms of bond issuance, from january to june this year, the national government issued 1825.9 billion yuan in new local government bonds, including 332.4 billion yuan in general bonds and 1493.5 billion yuan in special bonds. from january to june 2023, the country issued 2735.3 billion yuan in new bonds, including 434.4 billion yuan in general bonds and 2300.9 billion yuan in special bonds. in other words, both land transfer fee income and bond issuance, two important cash flows, have declined.

under such circumstances, various expenses of local governments, including basic expenses for government operations, civil servants' salaries, teachers' salaries, etc., are under pressure.

of course, local governments will seek help from the central government. the central government will help local governments replace debts through special government bonds and long-term government bonds, replacing high-interest debts with low-interest debts, but this cannot solve the fundamental problem. the fundamental problem is still the cash flow pressure of local governments. the cash flow that they originally relied on suddenly decreased, and no new sources of income were found. although the current central government has set the tone to cultivate local governments' independent financial resources, this thing is very slow and cannot solve the urgent problem. the shortage of cash flow is the top priority.

periscope: some local governments mainly repay debts by disposing of assets. what do you think of this way of debt reduction?

zhao jian: some local governments still have relatively good liquidity and can raise funds through bank loans. qualified local governments can continue to issue municipal bonds, but some local governments, especially those that have relied too much on land transfer fee income and bond issuance in the past, can only dispose of their existing assets.

but it is actually quite difficult to dispose of assets, because many or most of the assets held by local governments are non-profit assets, such as industrial parks, platform companies, industrial new towns, etc. some of them may be empty shells or low-efficiency assets, which are difficult for social capital to take over.

in addition, whether the sale of assets is successful and whether private capital will take over depends on whether the price is appropriate on the one hand, and on whether private enterprises will also consider the local business environment and whether there are investment opportunities on the other hand. however, when local governments sell assets, there are also many institutional obstacles when setting prices, such as whether it will cause the loss of state-owned assets and whether they will be held accountable, etc. therefore, it is very difficult to dispose of assets.

periscope: what short-term solutions and long-term mechanisms do you think are available to resolve local debt?

zhao jian: i think the central government has imposed very rigid requirements on local governments, including strict constraints on issuing new bonds and new investment projects, requiring local governments to streamline administration and conduct structural reforms. however, this is not without a bottom line. there must still be a funding quota to cover the basic bottom line risks. for example, special government bonds will have some special quotas allocated to different places. so there is actually a bit of a game between the two sides to see who can outlast the other.

as for the debt reduction plan, i think it is good to be able to stabilize it. the first thing is to survive the cycle and get through this stage. resolving pressure cannot rely on policies. if policies are omnipotent, there will be no crisis in the world. then solve these problems in development. the ultimate solution is not to resolve the debt, but to develop the entire economy. if the economy does not develop, local debts cannot be resolved well, which will form a vicious cycle and deflation cycle.

in terms of long-term mechanisms, we must return to the tone set by the third plenary session of the 18th cpc central committee, including the division of financial and administrative powers between the central and local governments and increasing local autonomous financial resources.

periscope: some scholars believe that under the tone of active fiscal policy, local governments should still take positive actions and should not over-exaggerate the need to live a tight life. what do you think?

zhao jian: i think there is a big problem and distortion in the current local government policies. it is more about exaggerating the need to live a frugal life in slogans, but it does not solve the actual problems in action. the concept of living a frugal life mentioned by local governments may mainly be to avoid wasting fiscal funds and strengthen cost management, which is acceptable.

however, this slogan itself releases an expectation of tightening. this is not conducive to the recovery of current economic expectations and confidence. for example, government spending or official consumption, as well as the salary income of civil servants, these consumption and expenditures themselves are a benchmark for the average income and expenditure of the entire society. the government is both an investor and a consumer. civil servants are also a large consumer group and part of china's modern economy. why should they live a tight life? local governments can oppose waste from an institutional and legal perspective, but there is no need to let institutions and people live a tight life.

periscope: some people believe that after the central government’s macroeconomic policies were introduced, local governments took active actions, which magnified the policy effects. if local governments are not very motivated, the effect of fiscal policies will be limited. what suggestions do you have for fiscal policies?

zhao jian: the implementation of fiscal policy has a fiscal multiplier. the government's investment will have a pulling effect. investing funds in different fields may create different pulling effects, especially in stimulating the enthusiasm of private enterprises. now the fiscal multiplier is indeed declining.

my suggestion is to do more to improve people's livelihood finance. first, the central government should take over the responsibilities related to people's livelihood, and then solve them by issuing national bonds, reducing the responsibilities and burdens of local governments in people's livelihood. if local governments have too many responsibilities and their financial power is restricted, then finances will definitely be difficult to support.

second, the central government should use fiscal resources to vigorously improve social security, increase unemployment benefits, and improve medical standards. this will boost residents' confidence and relieve them of worries. i think that at the current stage of development in my country, we need a new concept, that is, we should not think that our high-speed railways, airports, roads and pipelines have been built in large quantities, and we should not think that these are the only national assets. i think the people's hearts and confidence are still the biggest intangible assets. i think this is the direction of our fiscal investment in the future. after social security is stable, consumption will rise and the economy will circulate.