China’s provinces suffer major fiscal hit from Covid zero

Bloomberg

China’s doubling down on its zero-tolerance stance towards Covid-19 is draining local-government coffers, posing a fresh threat to the economy and bond investors.
Jilin province, in the northeast of the country, has warned of “increasingly outstanding conflicts” between spending and income. Finances at almost half of its 60 county and district level governments are so tight they are exposed to “operational risks,” the provincial finance department said in its first-half budget execution report released last month.
All 31 provincial regions in China — with the exception of Shanghai — logged a deficit in the first seven months of the year. Authorities handed out trillions of yuan in tax breaks to support businesses amid the economic slowdown, as well as covered the cost of Covid Zero policies, such as mass-testing and restricting the movement of residents. Plunging land sales are adding to the squeeze by cutting a key funding source.
Pressure on local government finances is likely to intensify as the Communist Party steps up Covid-fighting efforts before the twice-a-decade congress. Health officials this month announced a raft of measures that will be in place until the end of October,
including asking local governments to test residents regularly, regardless of infection levels. Lockdowns are happening with rising frequency, with Chengdu, the country’s sixth-largest city with 21 million people, being one of the most recent.
The result is municipal governments are seeking to cut spending where they can. Government employees in coastal regions have had their income slashed as bonuses and subsidies were scrapped, according to local media reports.
Tax revenues are also being squeezed. Provinces granted
2.2 trillion yuan in tax rebates this year through the end of August, a third more than was planned for the whole year. They were also tasked with cutting taxes by another 1 trillion yuan for the whole year.