1 Financial authorities of two provincial capitals air debt troubles, make public plea for aid
May 15
The municipal finance bureau of Hohhot, the capital of the Inner Mongolia Autonomous Region, published an article on its website titled, “Keep the Bottom Line of the ‘Three Guarantees’ Firmly in Place to Ensure Smooth Grassroots Operation” (兜牢兜實“三保”底線 確保基層平穩運行).
The article stated the following data:
- In April 2023, Hohhot’s general public budget revenue increased 20.91 percent to 8.309 billion yuan while its general public expenditure grew 34.84 percent to 15.053 billion yuan. (i.e. Hohhot’s expenses are 1.81 times greater than its income.)
- At the end of April 2023, Hohhot’s “three guarantees” (guaranteed basic livelihood, wages, and operations) expenditure totaled 6.599 billion yuan.
The article then pointed out three financial and debt difficulties Hohhot currently faces:
- First, Hohhot authorities have trouble balancing its budget. So far this year, the revenue generated from land sales is low and the authorities have difficulty generating more income. This means that the city’s finances are very tight, and it is struggling to service its debt that must be repaid in the first half of 2023, as well as repayments on pandemic-related spending in the last two years. Further, the “three guarantees” budget that must be allocated this year accounts for 42 percent of the city’s available financial resources, which compels the authorities to issue bonds to finance the construction of key projects instead of tapping into its budget.
- Second, Hohhot’s debt burdens are heavy. As of the end of 2022, the city’s balance of implicit debt was 92.836 billion yuan, or 18 percent of the total implicit debt in Inner Mongolia. Also, Hohhot’s balance of debt incurred through financing means (bond issuance, loans, borrowing, etc.) was 65.768 billion yuan, accounting for 71 percent of its total implicit debt, while debts related to construction projects (arrears of payment for works, materials, etc.) accounted for just 29 percent of the implicit debt. The authorities also have increasingly less room to resolve its debt issues through other measures.
- Third, Hohhot has trouble with payment in arrears. This problem is becoming increasingly serious for the city and is one of the worst in Inner Mongolia. The authorities acknowledge difficulties in resolving this problem, given the city’s current financial shortages.
The article proceeded to list what the higher authorities could do to help Hohhot with its financial and debt crisis:
- The Hohhot authorities implore the central and provincial authorities to consider handing out special subsidies to areas with serious financial shortages to finance their “three guarantees” expenses.
- The Hohhot authorities implore the provincial authorities to increase transfer payment subsidies and make financial resources available to help the city resolve its problem with payment in arrears.
- The Hohhot authorities suggest that the central government can include more funds to help finance people’s livelihood-related expenditures as part of the direct funds given to the city.
- The Hohhot authorities request that a larger general bond and special bond quota be allocated to the city.
- The Hohhot authorities implore the provincial financial bureau to help the city seek the maximum debt swap quota from the Ministry of Finance.
- The Hohhot authorities implore the provincial authorities to allow it to increase the scale of its refinancing bonds so that it may make repayments on maturing government debt.
May 16
The municipal finance bureau of Guiyang, the capital of Guizhou Province, issued a summary report of its work in 2022 (貴陽市財政局2022年工作總結).
The report disclosed the following:
- Guiyang City’s tax revenue has fallen sharply due to factors such as economic downturn, tax and fee reductions, and the COVID-19 pandemic.
- In 2022, Guiyang’s general public budget revenue decreased year-on-year by 5.8 percent to 40.216 billion yuan, while its general public budget expenditure increased year-on-year by 6.5 percent to 72.642 billion yuan. (i.e. Guiyang’s expenses are 1.8 times greater than its income.)
- In 2022, Guiyang’s non-tax revenue was 36.5 percent of total revenue while the non-tax revenue at the municipal level was as high as 45.5 percent. The city has no room for non-tax revenue growth in 2023.
- The Guiyang authorities need to service about 38.8 billion yuan worth of implicit debt in 2023, and will have difficulties in rolling over the implicit debt and issuing refinancing bonds. City and county state-owned enterprises are experiencing difficulties in raising funds and issuing bonds. Guiyang has insufficient resources to service its debts and there is great pressure of debt default.
- The Guiyang authorities have “basically exhausted” the technical means of fixing its debt problems in recent years. The authorities suggest that it could service its “remaining implicit debt” only through “non-borrowing” measures like “coordinating financial funds” (i.e. securing funds from various channels, including getting the higher authorities to transfer funds to the lower authorities) and tapping into the “operating income of some enterprises” (i.e. the future operating income of state-owned enterprises).
- Districts and counties managed by Guiyang City such as Gui’an New District have relatively large debts. Those places could see defaults “at any time” if the debt cannot be repaid in a timely manner.
According to earlier mainland media reports, Guiyang City has 21 municipal investment platforms (including those at the city level and subordinate districts) that have issued a total of 79.2 billion yuan worth of bonds.
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At the time of writing, the Hohhot City financial bureau’s article and the Guiyang City’s summary report, as well as relevant reporting by mainland media on those documents, have been deleted.
Backdrop
On April 12, the Guizhou authorities published a special survey of the province’s local government debt situation which found that local governments in the province were deeply in debt, were unable to turn around their debt situation themselves, and were looking towards the higher authorities for help with their debt crisis.
On April 25, mainland media reported that the local governments of some counties and cities in Yunnan Province had publicly stated that they were under enormous pressure to resolve their debt problems and hardly have enough financial resources to pay wages.
Big picture
China’s economic data for April fell short of expectations, causing several international financial institutions to lower their projections for China’s GDP growth for 2023.
Our take
The open appeal by the local authorities of Guiyang and Hohhot to the central government to help with their debt problems is another sign that the CCP regime’s internal crises and risks are very severe. Hohhot and Guiyang, like Guizhou and Yunnan, are from the more economically impoverished parts of China and are expected to be at greater risk of default on their debt than other areas given the rapid deterioration of the Chinese economy in recent years (especially during the three years of “zero-COVID”), although other areas could be in worse condition. Local government debt troubles will further stymie China’s post-“zero-COVID” economic recovery and dim the regime’s growth prospects.
Some issues exposed by the Hohhot and Guiyang debt trouble include:
Local government financial problems
Both Guiyang and Hohhot refer to local financial difficulties, economic downturn, the lingering impact of “zero-COVID,” a substantial reduction in tax revenue, and a sizable increase in expenditure.
Hohhot finance bureau data records its “three guarantees” expenditure for the first four months of 2023 at 6.599 billion yuan, a figure that is 31.9 percent of the city’s general public budget revenue (20.7 billion yuan) over the same period.
Meanwhile, the Guiyang authorities’ claim that its proportion of non-tax revenue in 2022 is already high and there is no room for growth in 2023 indicates that it is nearing the limit of how much it can extract from local residents and companies through imposing oppressive administrative fines. The Guiyang authorities have likely weighed that further imposing administrative fines on the aforementioned groups will lead to “killing the goose that lays the golden eggs.”
Reduced land sales revenue
The Hohhot authorities’ disclosure that it is struggling to support its finances through land sales is in line with the findings in China Index Academy’s May 8 report that we listed in our May 11 newsletter. The report noted that the volume of residential land available in 300 monitored cities fell by more than half and the overall transaction volume and price declined. Additionally, the total revenue generated from land sales or land transfer fees in those cities dropped by more than 30 percent from a year ago.
While the CCP authorities began to loosen restrictions on real estate financing near the end of 2022, property developers are likely still hesitant to take on more projects and expand given the uncertainties over “zero-COVID” and poor economic conditions. Moreover, China’s population is clearly shrinking and Beijing has observed that “demand is insufficient.” Lower demand and reduced building would naturally lead to fewer land sales and a sharp drop in revenue for local governments.
Aftereffects of ‘zero-COVID’
The Hohhot authorities still have to make payments on “zero-COVID”-related expenditures (nucleic acid testing fees, “fangcang” hospital construction, epidemic prevention personnel wages, etc.) from the previous two years in 2023. Other local governments across China are likely faced with a similar situation, and could be paying off their “zero-COVID” debt for some time.
‘Three guarantees’ expenditure
The Hohhot authorities’ spotlighting of its “three guarantees” expenditure suggests that it is spending increasingly larger sums to sustain grassroots operations and social stability in the city. This deprives Hohhot of funds to drive economic growth through infrastructure construction and perpetuates a vicious cycle where the local government finds itself spending more and more to “guarantee” people’s livelihoods and operations and sacrificing economic growth that would secure those “guarantees” in the process.
Should Hohhot’s problems be widespread, then the central government’s propaganda about restoring economic confidence will remain empty talk.
Technical defaults
The Hohhot and Guiyang local governments are essentially in technical default based on the details that they have made public.
The Hohhot authorities will likely see its problem with payment in arrears worsen over time and will need to pay interest of more than 65 billion yuan on its implicit debt. With the city’s current ability to generate revenue, it would find it immensely difficult to service its debt and make repayments on time.
Meanwhile, the Guiyang authorities have obliquely acknowledged that it cannot further rollover its debt by noting that it has “basically exhausted” the technical means of fixing its debt problems, and that the only way out of its debt troubles is having the higher authorities bail out the city.
Put another way, the Guiyang and Hohhot local governments have basically “forewarned” their higher authorities that they have reached the end of the rope and urgently need support to avoid disastrous defaults that would impact regime security more broadly. The scrubbing of the Guiyang report and the Hohhot article, as well as relevant mainland media reporting, suggests that the central authorities got the message and had engaged in damage control. Should Beijing decide to move strongly on the censorship front, other local governments could find it very hard going forward to emulate Guiyang, Hohhot, Guizhou, and Yunnan in making public their financial and debt difficulties.
Higher authorities taking a cut?
The Hohhot authorities’ proposal that the central government sends it more direct funds on the pretext of supporting its people’s livelihood-related expenditures suggests that the higher authorities between Hohhot and the central government could have previously been siphoning off a portion of funds that were meant for the city. The practice of higher authorities taking a “cut” of central government funds meant for lower-level authorities is one of the reasons why local governments further down the food chain often struggle to properly implement Party Central’s orders and have heavier financial burdens.
2 Party Central’s training session for village officials hints at growing instability in rural areas
The Central Organization Department and the Central Party School jointly held a national video training course for village Party secretaries and directors from April 24 to April 28, according to a May 16 report by Party mouthpiece People’s Daily.
People’s Daily said that this was the first time that the Central Organization Department and the Central Party School had directly conducted training for village cadres, and the training session was also the largest for grassroots cadres in rural areas to date (main classroom in Beijing, 3,568 sub-classrooms in provincial and county Party schools, etc.). People’s Daily also said that the training will “set a model for the training of grassroots cadres in rural areas” and is of “great significance for comprehensively improving the ability of village teams to lead rural revitalization.”
Backdrop
End of 2022: City and county-level governments across China set up Comprehensive Agricultural Law Enforcement Teams (CALET) per the central government’s requirements. CALET personnel, colloquially nicknamed “nongguan” (i.e. a rural equivalent of the urban administrative and law enforcement personnel known as “chengguan”), start exercising and abusing their authority as they attempt to “manage all matters” in rural areas, resulting in a spike in conflicts between the rural authorities and the peasantry.
March 2023: The CCP authorities establish the Central Social Work Department as part of Party and state institutional reforms introduced around the Two Sessions period. We analyzed at the time that the Department appears to be a “non-violent stability maintenance organization that strengthens Party Central’s grip over society through the control of CCP and social organizations.”
April 2023: Beijing rolled out an indoctrination campaign to have officials and cadres “learn and implement” Xi Jinping’s political theory with the aim of “unifying thought, will, and actions (of officials) with the Party’s innovative theory.” The central government also dispatched central supervision teams to inspect state-owned enterprises and other regime organs.
Our take
1. The central government’s effort to train village-level and other grassroots cadres appears to be part of Xi Jinping’s long-term and gradual effort to strengthen his control over the entire Party and all levels of Chinese society since taking office in 2012.
Xi’s power consolidation and tightening of control over the regime is partly an attempt to get ahead in “you die, I live” factional struggle with the Jiang Zemin faction and other rival interest groups in the Party elite, and partly an effort to tackle longstanding crises (some of which were caused by his predecessors) and better position the CCP to survive and dominate. Xi hinted at this in his 20th Party Congress work report when he observed that “a number of prominent issues and problems — some of which had been building for years and others which were just emerging” had occurred under his predecessors and “demand urgent action.”
Xi’s 20th Party Congress work report also mentioned a need to strengthen the Party’s leadership over the grassroots to solve the problem of lax grassroots organization. In particular, the report called for “adhering to the clear direction of grasping the grassroots,” “continually rectifying weak and lax grassroots Party organizations,” and “building grassroots Party organizations into strong battle fortresses that effectively realize the Party’s leadership.”
2. Beijing’s effort to train rural grassroots cadres also appears to be part of the CCP’s strategy to revitalize the countryside. An opinion on promoting key rural revitalization work in a “comprehensive manner” issued by Party Central and the State Council in January 2023 (關於做好2023年全面推進鄉村振興重點工作的意見) called for conducting “comprehensive training to improve the ability of township and village teams to lead rural revitalization” and “centralizing training for rural Party members in phases and batches.”
3. Xi Jinping’s attempt to strengthen his leadership at the grassroots level in rural areas is likely aimed at overcoming the problem of “orders not leaving Zhongnanhai,” implementing various rural reforms (property rights reform, expanding agricultural production, etc.) per Beijing’s design, and ensuring more effective governance to enable the regime to deal with increasingly serious risks and crises.
The Xi leadership would be concerned about growing social instability in rural areas stemming from economic woes and corrupt governance. As the CCP itself has acknowledged with its anti-corruption campaign, long-time collusion between officials, triads, and businessmen at the grassroots level and in rural grassroots organizations have caused all sorts of problems for the regime over the years. In particular, serious corruption and abuse of power by those in charge and local interest groups have worsened social contradictions in rural areas.
Social contradictions in rural areas have gotten so bad that some people have taken it upon themselves to “exterminate” (i.e. kill) village officials who engaged in bullying, corruption, and other oppressive behavior. In a number of these “extermination” cases, the perpetrator is often found to be a “salt-of-the-earth” person who murdered the official(s) in a bout of desperation. Some recent cases this year include:
- Jan. 19: A man surnamed Yang from Pingyang County in Zhejiang’s Wenzhou City killed all six members of the village Party secretary and director’s family with a knife.
- March 27: A person surnamed Lin from Putian City in Fujian Province took a knife to the family of a Party secretary (who were the person’s neighbors), resulting in two deaths and one injured.
- April 6: A person surnamed Wu from Luming Township in Chongqing’s Pengshui County killed four people when attempting to murder a village official. Later, the perpetrator attempted suicide by drinking pesticide.
- May 1: A person surnamed Xu from Dingxiang County in Shanxi Province killed a village official and his family of three.
- May 8: An English teacher surnamed Jia from Xili Village Middle School in Changqing District, Jinan City killed a village Party secretary and his family of three to avenge his daughter, who was raped and bullied by the Party secretary’s son until she suffered from mental disorder.
- May 11: A 64-year-old farmer from Majiagang Village in Donggang City, Liaoning Province stabbed the wife of a village Party secretary and several of his relatives over the unfair distribution of land. Seven people died on the scene, while some others died in the hospital from severe injuries.
We believe that the Xi leadership will not be able to overcome the systemic deficiencies of the CCP authoritarian system simply by training village cadres and strengthening Xi Jinping’s control over grassroots officials and organizations. If anything, social contradictions will likely intensify as the “nongguan” and other rural officials squeeze the peasantry more tightly to achieve the various policy targets set by the central government.
