Reuters:

Some local governments face a tight fiscal balance due to less revenue from land sales, anti-COVID spending, infrastructure expenditure, and pressure from maturing debts in large volumes. How does the MOF view this situation?

Liu Kun:

Your question includes many small ones. Thank you very much for your questions. First, I would like to brief you on the revenue and expenditure of local governments last year. In 2022, revenue in local governments' general public budget was 10.88 trillion yuan, an increase of 5.9% after deducting value-added tax (VAT) credit refunds. Expenditure in local governments' general public budget was 22.5 trillion yuan, an increase of 6.4% over the previous year. The fiscal performance of local governments was generally stable. With the improvement and adjustment of epidemic prevention and control policies, and the continuous effects of the package of policies and follow-up measures to stabilize the economy, the economy is expected to pick up, in general, this year, and the fiscal performance of local governments is expected to improve gradually.

Your question contains three small questions, which I would like to answer one by one.

Regarding revenue from land sales, a large part of the budgets of local government-managed funds come from land sale revenue. Looking at the budgets of local government-managed funds across the country, some revenue was transferred to the general public budget, accounting for about 15% of the budgets of local government-managed funds. Although there was a decline last year, the effect on expenditure in local governments' general public budget was controllable. The specific data is yet to be determined in the final accounts. However, suppose we estimate based on a decrease of about 2 trillion yuan in revenue from land sales in 2022. In that case, the affected financial capacity in local governments' general public budget will be about 300 billion yuan. I would also like to point out that revenue from land sales is gross revenue. When revenue decreases, there will also be a corresponding reduction in cost outlay, such as compensation for demolition and relocation. Since revenue and expenditure are interconnected, the revenue decline has no significant influence.

You also mentioned pressure from maturing debts in large volumes. Regarding debts, the liability ratio of statutory debt last year was about 50%, a relatively low level by global standards and in the economic world. The main problem regarding the debts of China's local governments is that they are distributed unevenly, with some regions facing higher debt risks and pressure to pay principal and interests. We have urged local governments to assume their primary responsibility for defusing local government debt risks to ensure no systemic risks arise. That's a bottom line we can hold to.

You also asked about the fiscal balance of local governments. Revenue in local governments' general public budgets grew by an average of 2.5% from 2020 to 2022, compared with a 2.1% decline last year. You also said it was falling and in a state of borderline sufficiency. It fell by 2.1% last year, many percentage points lower than the ten-year average. But you have to know that the financial capacity of local governments is not the same as local-level revenue in their general public budget. About 40% of local governments' financial capacity comes from transfer payments from the central government. In the past three years, transfer payments from the central government have grown at an average annual rate of 9.3%. I mentioned at the very beginning the average growth rate over the past five years, and here is that over the past three years. You can see that our transfer payments to local governments are growing. The 9.3% growth rate was 6.8 percentage points higher than the growth rate of revenue in local governments' general public budgets, effectively making up for the shortfall in local-level revenue. In terms of the execution of local budgets, local government expenditures have increased by an average of 3.4% in the past three years. Therefore, it is a state characterized by borderline sufficiency but an increasing aggregate. Local budgets are well executed. Thank you for your question.