The Chinese government is facing a growing shortfall of cash, as they predict an increase of debt to fill the gap.
The latest wave of Omicron has resulted in a sharp contraction in government revenue, including land sales revenue, according to a report.
They estimate that there is a funding gap of over $8 billion due to tax refunds, weaker economic production, and lost land sales revenue.
Much of the incomingStimulus measures will be used to fill the funding gap, according to the analysts.
They listed several measures that could be used to make up for the shortfall, because they think it will be hard to fill the 3.5 trillion figure.
Economic data for April showed a decline in growth. During a rare nationwide meeting last week, the premier said that the difficulties were greater than in 2020.
Land sales, a significant source of local government revenue, have plummeted after Beijing cracked down on real estate developers with high reliance on debt. Beijing has announced to support growth with tax cuts and refunds.
The Japanese bank and analysts from other firms did not give a specific figure on how much debt might be needed. They pointed to growing pressure on growth that would require more support from debt.
Excluding tax cuts and refunds, local fiscal revenue grew by 5.4% in the first four months of the year. The ministry said that eight of China's 31 province-level regions saw a drop in fiscal revenue.
Fiscal revenue for the first four months of the year declined in the regions of Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin. The decline was 27% for Tianjin.
Tibet was the only province-level region to see a decline in fiscal revenue.
Pinpoint Asset Management's president and chief economist said that the decline of fiscal revenue happened not only in cities under lock and key.
The economic costs are not limited to a small number of cities.
In order to control its worst Covid outbreak in two years, mainland China has imposed stay- home orders and travel restrictions in many parts of the country.
Shenzhen, the southern tech hub of China, released figures showing a drop in fiscal revenue in April. In March, the year-on-year decline was 7%.
Local governments are facing fiscal pressure. Their expenditure is going up, but revenue is going down. The central government may have to revise the fiscal budget to help the local governments.
In March, Beijing announced an increase in the transfer of funds from the central to the local governments. The Ministry of Finance said some funding for next year would be transferred ahead of time to help local governments with tax refunds and cuts this year.
Susan Chu is the senior director at S&P Global Ratings. Deficit pressure will come from infrastructure spending and tax cut allocation, she said.
There is a chance of more borrowing or debt burden in the future if there is a widening deficit. She doesn't expect off-budget borrowing to come back, but it is an important signal to watch for.
In late April, Chinese president called for a nationwide push to develop infrastructure. It was not clear when the projects would be constructed.
Jack Yuan, VP and senior analyst at Moody's Investors Service, said in a phone interview that there will be less money left over for infrastructure expenditure this year.
Since land sales have been an important source of local government spending on infrastructure, a drop in land sales and limited increase in special purpose bonds would restrict financing options for infrastructure spending.
The debt is expected to rise this year as a result of the economic pressures, but it remains to be seen how Beijing will balance economic growth with debt levels.
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