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Cities In China Are Running Out Of Cash To Pay For Covid Lockdowns

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Cities In China Are Running Out Of Cash To Pay For Covid Lockdowns

(CTN News) – Beijing’s China zero-covid policy is unpopular this week, as demonstrated by protests across the country. In addition to loosening pandemic controls, the country is facing another obstacle: local governments are running out of cash and could cut corners or reduce other essential services.

China didn’t go into recession in 2020 because of the zero-covariance policy. Three years later, the bills are piling up, straining municipal authorities in the world’s most populous nation.

George Magnus, an associate at Oxford University’s China Centre, told CNN Business that if lockdowns and mass testing continue, “financial stability risks will increase.”

Local governments are under huge pressure from maintaining zero-Covid, and we can already see this in debt sustainability, local assets being sold, and so on.

Local governments are more vulnerable than the central government since they depend heavily on land sales. During January-October, they spent 11.8 trillion yuan ($1.65 trillion) more than they earned, borrowing heavily to do it.

The ballooning government debt threatens China’s economy. In addition to increasing the risk of municipalities defaulting on their debt, it also limits the government’s ability to spur growth, stabilize employment, and expand public services.

History’s widest

It’s been up to local governments to enforce pandemic controls for nearly three years. Regular mass testing, mandatory quarantine stays, and other services during frequent lockdowns have resulted in soaring expenditures while income has stagnated.

The problem is that they don’t have enough revenue to cover their spending needs. Despite making up half of general government revenue, they make up over 85% of expenditures.

Early this month, DBRS Morningstar, a Toronto-based global credit rating agency, warned that local governments’ high deficits were a major concern, including so-called “hidden debt” from special financing tools meant to boost funding.

There’s some of this debt that’s never officially acknowledged.

“Higher deficits and lower nominal GDP growth will lead to China’s general government debt rising to 50.6% of GDP in 2022,” much higher than 38.1% pre-pandemic.

Globally, that’s still low. For China, it would be a historic high.

Local governments’ weak fiscal position has hurt the country’s overall finances.

According to CNN Business calculations based on data from the Ministry of Finance, China’s broad fiscal deficit was 6.66 trillion yuan ($944 billion) in the first ten months of 2022, nearly tripling from a year ago.

According to Zhao Wei, chief economist at Shanghai-based Sinolink Securities, the broad fiscal deficit could be the biggest in history by 2022.

Is zero-covid over?

Despite soaring infection rates, some cities are easing COVID restrictions following a series of protests across the country.

People clashed with police during demonstrations against overly restrictive restrictions in Guangzhou, the southern city, on Wednesday. On the same day, Chongqing eased COVID curbs.

China’s vice premier, Sun Chunlan, who’s in charge of public health, said Wednesday that Covid 19 was at a new stage.

Still a long way to go before zero-covid ends. Sun says we need to improve vaccination rates for the elderly and hospital capacity.

Although zero-covid isn’t financially sustainable, it’s likely to stick around as long as protests are isolated and sporadic, says Craig Singleton, a senior fellow at the Foundation for Defense of Democracies in Washington. As a way to limit any surge in cases, local authorities may still rely on COVID restrictions.

In the past few years, local governments have been under pressure to prevent outbreaks. Those who fail have been punished, so there’s a disconnect between what’s said and what’s happening

“Politics is supreme,” said Andy Xie. Zero-Covid needs money from local governments. They can cut spending in other areas as well. They’ll be fired if they don’t.”

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