China's local government debt problems are a hidden drag on economic growth

cnbc.com:

BEIJING — China's persistent consumption slowdown traces back to the country's real estate slump, and its deep ties to local government finances — and debt.

The bulk of Chinese household wealth went into real estate in the last two decades, before Beijing began cracking down on developers' high reliance on debt in 2020.

Now, the values of those properties are falling, and developers have reduced land purchases. That's cutting significantly into local government revenue, especially at the district and county level, according to S&P Global Ratings analysts.

They predicted that from June of this year, local government finances will take three to five years to recover to a healthy state.

But «delays in revenue recovery could prolong attempts to stabilize debt, which continues to rise,» Wenyin Huang, director at S&P Global Ratings, said in a statement Friday to CNBC.

«Macroeconomic headwinds continue to hinder the revenue-generating power of China's local governments, particularly as related to taxes and land sales,» she said.

Huang had previously told CNBC that the financial accounts of local governments have suffered from the drop in land sales revenue for at least two or three years, while tax and fee cuts since 2018 have reduced operating revenue by an average of 10% across the country.

This year, local authorities are trying hard to recoup revenue, giving already strained businesses little reason to hire or increase salaries — and adding to consumers' uncertainty about future income.

As officials dig into historical records for potential missteps by businesses and governments, dozens of companies in China disclosed in stock exchange filings this year that they had received notices from local authorities to pay back taxes