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wu ge/text core ideas:

1. a hundred-foot high platform rises from the base of the earth. over the years, healthy local development has formed the cornerstone of my country’s positive economic cycle. especially in the period of counter-cyclical regulation, local governments are an important carrier of efforts. however, local fiscal revenue and expenditure have dropped significantly recently, which has brought with it trade-offs between stabilizing economic growth and reducing debt and preventing risks. how will policies be chosen and where will the economy go?

2. although the accumulation of local local debt does not occur overnight, the recent sharp adjustment in land transfer revenue has led to more significant changes in incremental financial resources. a common phenomenon during overseas real estate adjustments is a "financial accelerator," in which the shrinking valuation of real estate collateral directly suppresses credit expansion. for economies that are more dependent on land finance, "fiscal accelerators" deserve more attention.

3. unlike bank loans, local government debt issuance in my country does not require explicit collateral, but potential land transfer revenue is often regarded as an important source of debt repayment funds. if this revenue is expected to remain low in the future, local incremental borrowing behavior will naturally tend to be conservative, which may accelerate the procyclical impact of local finance on economic growth rather than a true countercyclical effort.

4. looking to the future, the signal of efforts to complete the economic and social development goals and tasks for the whole year has been strengthened, and countercyclical policies have been stepped up. however, the key to the effectiveness of the policy is to promote the real estate market to stop falling and stabilize, thereby blocking the "fiscal accelerator" and "financial accelerator". whether the real interest rate on the demand side can be significantly reduced and whether public funds on the supply side can intervene in risk management are all important points to observe.

text:

over the years, healthy local development has formed the cornerstone of my country’s positive economic cycle. especially in the period of counter-cyclical regulation, local governments are an important carrier of efforts. however, local fiscal revenue and expenditure have dropped significantly recently, which has brought with it trade-offs between stabilizing economic growth and reducing debt and preventing risks. how will policies be chosen and where will the economy go?

1. should we rely on the local government or the central government?

from a historical perspective,the importance of local governments in consumption, investment and credit expansion is significantly higher than that of the central government. after excluding transfer payments from the central government to local governments, local governments account for about 60% of general fiscal expenditures, occupying a dominant position.

figure 1. who relies on financial resources?

source: wind, author’s calculation

note: fiscal expenditure is a broad category, and local expenditure excludes transfer payments from the central government to local governments, the same below.

the accumulation of local debt does not happen overnight, but the recent sharp adjustment in land transfer revenue has led to more significant changes in incremental financial resources. a common phenomenon during overseas real estate adjustments is a "financial accelerator," in which the shrinking valuation of real estate collateral directly suppresses credit expansion. for economies that are more dependent on land finance, "fiscal accelerators" deserve more attention.

figure 2. fiscal accelerators and financial accelerators

source: drawn by the author

unlike bank loans, local government debt issuance in my country does not require explicit collateral, but potential land transfer revenue is regarded as an important source of debt repayment funds.this round of land transfer revenue has fallen by about 40% from its high point, which is the largest cumulative decline since data is available.if this revenue is expected to remain low, local incremental borrowing behavior will naturally tend to be conservative, which may accelerate the procyclical impact of local finance on economic growth rather than a true countercyclical effort.

figure 3. real-life performance of financial accelerators

source: wind, author’s calculation

note: debt includes local special bonds and urban investment interest-bearing liabilities, and excludes investment-oriented debt.

2. prevent risks or stabilize growth?

recently, many places have proposed "'selling pot and selling iron' to raise funds to resolve debts." judging from information from various places, debt repayment funds are mostly obtained through the liquidation of state-owned assets (such as houses, shops, and low-efficiency state-owned enterprises).this will help alleviate liquidity risks in the short term, but in essence corresponds to a two-way contraction of local government assets and liabilities. judging from chinese and foreign experience, the fall in the macro leverage ratio depends more on the rebound in nominal economic growth on the denominator side, not just on the reduction of debt on the numerator side.

figure 4. debt removal or leverage?

source: wind, author’s calculation

note: the scale of local debt repayment includes the urban investment part.

looking to the future, the signal of efforts to complete the annual economic and social development goals and tasks has been strengthened, and counter-cyclical policies have been stepped up. however, the key to the effectiveness of the policy is to promote the real estate market to stop falling and stabilize, thereby blocking the "fiscal accelerator" and "financial accelerator". whether the real interest rate on the demand side can be significantly reduced and whether public funds on the supply side can intervene in risk management are all important points to observe.

risk warning:expect non-linear changes.