Why Aren't Local Govts Spending? Audit Finds Reasons But No Explanation

A new focus of auditors is on local governments not spending appropriated funds. Nonfeasance, fake action or slow action has become a focus point as the government looks into why local officials have let funds languish for years on end. The worst example, in terms of time, is Lanzhou municipal government sitting on ¥135 million earmarked for emergency shelter construction. The money was appropriated in 2010, long before the anti-corruption crackdown.

Auditors published a report in May showing ¥10.1 billion in idle funds, of which ¥780 million was central government funding, so this is locally controlled money. If I have to guess, the most likely explanation for idle funds is the collapse in land sales.

WSJ: For China Property Watchers, Land Sales Cast Shadow
Lately housing sales have shown signs that the market is coming out of its funk. Housing sales in the first eight months of this year rose 8% to 616,494 square meters, and in August alone they rose 15.3% from a year earlier.

But land sales haven’t followed. The volume of land sales nationwide fell 32.1% to 141.1 million square meters in the first eight months this year, according to the latest data issued by the National Bureau of Statistics. In August alone, land transaction volume was down 32% from a year earlier.

“In August, many cities released land for sale, but it became local governments’ one-man show as many sites went unsold during auctions,” said property consultancy China Real Estate Information Corp in a note.

Taking a cue from weak land sales, construction starts should decline for three straight years from 2014 to 2016, said Citi Research analysts Oscar Choi and Marco Sze in a report.
Flashback: Deutsche Bank Says Land Sales Slowdown Only Started Hitting in Q4
The growth of land sale revenue collected by the government on a national basis remained positive at 16.6% for Q1-Q3 of 2014, but dropped on a quarterly basis from 40% yoy in Q1 to 0% in Q3 (Figure 5).

There is a common misperception that land revenue has already dropped sharply in 2014. The market appears well aware of the slowdown of property sales and land auctions in 2014. It likely overlooked the lag between land auctions cooling off and the decline of fiscal revenue. The reality is, land market started to cool down sharply in March 2014, but land sale from a fiscal revenue perspective in yoy terms remained positive until Q3 2014. We believe the fiscal shock to local government revenue only started in Q4. The full impact will likely be seen in H1 2015.

A sensitivity analysis shows our forecast for government revenue largely depends on our assumption for land sales (Figure 6). Our baseline case assumes land sale revenue to drop by 20% yoy in 2015. If land sale revenue drops by 10% in 2015, local government revenue would grow around 2.2%, still the lowest rate since 1983, except for the tax reform year of 1994...
Instead land sale by volume is down 32%. The decline in revenue is less because in cities such as Beijing, only prime properties are moving, in some cases setting new records for highest priced (per sqm) land sale. Still, the impact on revenues is huge and those revenues finance investment. The loss of this revenue is a Threat to the Development Model:
To recap the situation: Chinese local governments sell land to developers who build homes and commercial centers. The revenue from land sales pays for development of supporting infrastructure, everything from roads and subways to schools and parks. Land sales also finance local government debt which exploded after 2008. In the post-2008 economy, developers rushed to build property amidst a real estate bubble and when the government moved to restrict activity in first- and second-tier cities, developers poured into third- and fourth-tier cities and repeated the model. However, developers have run ahead of many local governments. In areas where there are true ghost cities, support infrastructure such as schools and hospitals have not been built. If the real estate bubble bursts and land sales fall, local governments will need to find another revenue source or they may be unable to finance the infrastructure that generates GDP growth and supports the local real estate market, and they may even face a debt crisis in some of the worst hit areas. This ignores all the potential issues with indebted developers, plus overproduction and bad debts in other sectors of the economy.
Until I hear a better explanation, the one that makes the most sense is local governments are strapped for cash. Funds earmarked for investment can be tapped to repay debt or meet more pressing obligations as long as they remain idle. For example, one of the areas that turns up frequently in the audit is Heilongjiang, a province that is in the middle of a recession:
The audit report released in June, Heilongjiang list again, Qitaihe City, Heilongjiang Province, the water supply project was classified as typical slow progress. Qitaihe City water supply project is one of the key livelihood projects in Heilongjiang Province in 2014, should start construction in April 2014. 2013-2014, Qitaihe City water supply projects accumulated 304 million yuan of funds in place. Because there is a big difficulty with land acquisition, relocation costs are too high, resulting in the need to change the pipeline route project, surveying, design and construction procedures and some other preliminary work has to be re-conducted. By the time of the audit, preliminary engineering costs and pay only for projects 22.8 million yuan, the project construction progress is slow.

...Heilongjiang, northeast China for the recent severe economic downturn in the audit results but high frequency appear, Wang Dehua that the northeast has its own peculiarities, project construction northeast Some companies affected by the seasons more serious, some construction because of seasonal reasons difficult to advance. But the economic downturn northeast so powerful, there is a lot of money in the audit of the problem is reflected in precipitation, indicating the Northeast, there are many areas for improvement, there must be a positive spirit, should be thinking about how to make good use of these funds.
A Heilongjiang water project is unable to acquire land, resettlement costs are high and others are having trouble due to seasonal factors. Has Heilongjiang fully implemented Li Keqiang's reform agenda, refusing to use government investment to boost a local economy that is in recession? A more likely explanation is governments are finding ways to slow spending, because "seasonal factors" is code for lack of funds.

EO: 审计署督查稳增长 3个月查出千亿资金趴窝

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