China faces a nearly $1 trillion funding gap. It will need more debt

BEIJING — The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase of debt to fill the gap.

“The latest wave of Omicron and the widespread lockdowns in place since mid-March have resulted in a sharp contraction in government revenue, including land sales revenue,” Ting Lu, chief China economist at Nomura, and a team said in a report last week.

They estimate a funding gap of about 6 trillion yuan ($895.52 billion) — roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production, and another 3.5 trillion yuan of lost land sales revenue.

“Much of the incoming ‘stimulus measures’, be it special government bonds or incremental lending by policy banks, will be merely used to fill this funding gap,” the Nomura analysts said.

It’s that 3.5 trillion yuan figure they expect will be hard to fill, and they listed several measures, from using fiscal deposits to increasing borrowing, that could be used to make up the shortfall.

Economic data for April showed weakening growth as Covid controls took a toll. Premier Li Keqiang said during a rare nationwide meeting last week that in some respects, the difficulties were greater than in 2020.

Even before the latest Covid outbreak, land sales, a significant source of local government revenue, have plunged following Beijing’s crackdown on real estate developers’ high reliance on debt. Local governments are also responsible for implementing tax cuts and refunds that Beijing has announced to support growth.

The Japanese bank and analysts from other firms did not share specific figures on how much additional debt might be needed. But they pointed to growing pressure on growth that would require more support from debt.

Excluding tax cuts and refunds, the Ministry of Finance said local fiscal revenue grew by 5.4% during the first four months of the year from a year ago. Eight of China’s 31 province-level regions saw a drop in fiscal revenue during that time, the ministry said, without naming them.

Incomplete data for the period from Wind Information showed the regions of Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin posted year-on-year declines in fiscal revenue for the first four months of the year. Tianjin was the worst with a 27% decline.

In 2021, Tibet was the only province-level region to see a decline in fiscal revenue, according to Wind.

It’s “important to notice that the decline of fiscal revenue happened not only in cities under lockdown,” said Zhiwei Zhang, president and chief economist, Pinpoint Asset Management.

“Many cities without Omicron outbreaks also suffered, as their economies are linked to those currently under lockdown,” Zhang said in an email in mid-May. “The economic costs are not…