China’s ‘Common Prosperity’ to Squeeze Cash

China is slowly approaching a cashless society, where the government has been easing restrictions on digital payments. But what will happen to those who hold large amounts of cash? Experts say they may be forced into going-cashless and turning it into gold or other precious metals as well.

China’s “common prosperity” is a new economic policy that has been implemented in the country. The policy will likely squeeze cash from citizens and businesses.

BEIJING— China’s local governments have long been burdened by debt. Now, Chinese President Xi Jinping’s campaign for “shared prosperity” is putting even greater pressure on them—while also losing some of their most secure sources of income.

Mr. Xi’s initiative, which is aimed in part at closing China’s wealth gap, is based on a desire to address the growing expenses of education, healthcare, and housing, which are known as the “three huge mountains.”

Beijing has taken a flurry of regulatory actions in the past year to rein in China’s private education and real-estate sectors. At the same time, as part of its efforts to address oncoming demographic difficulties, Beijing has committed to expand public education, healthcare, and housing options, as well as to increase the availability of child-care and elderly-care services.

Economists are skeptical of the policy’s viability since highly indebted local governments are expected to bear the brunt of the expenditures for such services.

“The budgetary objectives simply don’t make up,” says Daniel Rosen, co-founder and partner of Rhodium Group, a New York-based firm that examines China’s economy. “You can’t have what the government promises if the government can’t afford to pay for it.”

Many of the services that China’s governments will supply have yet to be specified, but analysts estimate the price to be substantial. For example, in China, schoolteachers have been required to work longer hours to fill the hole created by new limits on private education organizations, as part of a larger effort to level the playing field in education.

Ding Jianxiong was relieved when authorities in Beijing imposed stringent restrictions on for-profit education enterprises, promising instead to provide free extracurricular activities at public schools.

Mr. Ding, whose first-grade daughter now remains at school for two additional hours of academics, athletics, and art lessons, said, “All these programs after school are free, due to the government.” “It saves a significant amount of money and time.”

The issue is that most of the expense is borne by local governments, who are already under financial difficulty. According to the most recent official numbers, province, municipal, and county governments funded more than 80%, 70%, and 60% of China’s budgetary spending on education, healthcare, and housing initiatives, respectively, with the rest coming from the central government.

According to estimates by Zhang Zhiyong, a professor at Beijing Normal University, nearly a fifth of China’s county-level governments have not raised their education expenditure in recent years, as reported by Chinese official media. According to official media and government accounts, teachers in a dozen counties throughout the nation have not received their full salary since the Covid-19 outbreak started, leading the Education Ministry to make the problem of teachers’ pay a priority in recent months.

The rust-belt city of Hegang, on China’s northeastern border with Russia, has been compelled to conduct China’s first prefecture-level restructuring due to mounting debt. According to state media sources, the city suspended recruiting attempts for new junior-level personnel in December.

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Late last year, sanitation workers in Hegang, China, cleaned snow off a roadway.

Xie Jianfei/Zuma Press photo

Meanwhile, financial pressure on Honghe prefecture, 2,500 miles distant on China’s southern border with Vietnam, resulted in millions of dollars in unpaid payments for physicians and teachers, according to a report by legislators there in April 2021. As the federal and provincial governments promised additional services to serve the 4.5 million people in Honghe, the prefecture’s county governments resorted to informal loan channels, adding to their already hefty debt burdens, according to the study.

According to the research, “the situation of superiors formulating regulations and subordinates paying expenses is prevalent.”

Requests for response from the prefecture and China’s Finance Ministry were not returned.

Concerns regarding the finances of China’s local governments existed even before the common-prosperity drive.

Local authorities have historically been rewarded for generating significant economic development, leading them to depend on large-scale borrowing to finance infrastructure projects and meet GDP objectives. According to statistics from China’s Finance Ministry, local governments had accumulated the equivalent of more than $4 trillion in debt by the end of 2020, up 20% from the previous year. Economists and Beijing themselves see the debt as a danger to the country’s financial viability.

President Xi Jinping called for disobedience against international pressure during the Chinese Communist Party’s centenary celebrations in 2021. As China threatens the United States’ leadership in areas ranging from artificial intelligence to defense, WSJ’s Jonathan Cheng examines the country’s future prospects. AFP photo/Wang Zhao

That figure is commonly thought to be an underestimation, with significant debt buried in finance vehicles and hidden in various ways.

As the economy rebounded last year, Beijing refocused its efforts on reining down local government indebtedness, imposing borrowing limits on them. Vice Finance Minister Xu Hongcai stated in December that the central government would keep working to minimize local debts and that there would be no bailouts for governments that couldn’t pay.

Meanwhile, Chinese policymakers have launched a similar push to cool down the country’s inflated real estate market, which has cut off local governments’ other preferred source of revenue: land sales.

Strict limits on property developers’ leverage have hampered the ability of China’s once-free-spending real-estate companies, such as China Evergrande Group, to buy land at auction—an income source that will account for more than 40% of China’s self-raised revenues in 2020, according to Wall Street Journal calculations based on Finance Ministry data.

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On the outskirts of Nanjing, China, a China Evergrande development.

Qilai Shen/Bloomberg News photo

Local government income from land sales declined 9.9% year over year in November, the most recent month for which data is available. Revenues from land sales are expected to drop 15% this year, according to Goldman Sachs analysts, creating a financial deficit that would need the issue of more than $78.2 billion in official local government bonds to close.

According to analysts, legislative changes that might help alleviate the financing issue include increasing property taxes to additional parts of the nation or collecting money through a capital gains tax. Some municipal governments also own enterprises, which they may benefit from or sell off for a bigger portion of the earnings.

China has already announced a five-year experiment of property taxes in select areas. A property tax, if correctly administered, might help local governments manage their long-term financial problems, but economists caution that in the near term, it would likely deter house purchases and cut land sales income for local governments.

“It’s dubious if property-tax income is substantial enough to become a key revenue source for local governments in the long term,” says Betty Wang, a China economist with investment bank ANZ. If property taxes were applied nationwide, she believes that they would only generate a sixth of the money generated by land sales.

Allowing local governments to borrow more or raising fiscal transfers from the central government may be another answer, according to Hui Shan, Goldman Sachs’ senior China economist.

Beijing, too, is aware of the financial issue and has promised further budgetary reforms—but the process, according to Ms. Shan, is sluggish and halting.

She said, “The basic disparity between local government income and spending has not been adequately addressed.”

—This essay was co-written by Xiao Xiao and Grace Zhu.

Jonathan Cheng can be reached at [email protected]

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China has been working on a plan to redistribute wealth in 2020. The “china wealth distribution 2020” is the result of this effort.

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