Almost three years of zero-Covid policy takes its toll on China's coffers; local govt cash strapped

The past week saw protests rage across China, as in a rare outpouring of anger citizens across the country took to the streets protesting against the nation's stringent zero-covid policy and restrictions. To pacify the protestors, Beijing hinted at the loosening of pandemic controls, but now the nation faces another looming problem; cash deficit.

As per a CNN report, local Chinese governments, which were charged with conducting mass testing and enforcing quarantine to keep infection at bay, are now running short on cash. To deal with the problem, they may be forced to cut corners or reduce other vital services.

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China's zero-Covid policy which has been in place for almost three years now has negatively affected the nation's business and economy, While the policy kept China out of recession in 2020, after nearly three years the bills "are mounting", says the report. The bills have placed an extraordinary strain on the nation's municipal authorities.

Talking to CNN business, George Magnus, an associate at the China Centre at Oxford University predicted that if lockdowns and mass testing continue, the risk to the nation's financial stability will increase.

"Local governments are under huge pressure from the cost of maintaining zero-Covid, and we can already see this in the debt sustainability of several entities and [in] instances where public services are being scaled back, local assets or services sold and so on."

Compared to the federal government, local governments are more at risk because their income is mainly dependent on land sales. According to data from China's Ministry of Finance, they borrowed heavily to fund their expenditures of 11.8 trillion yuan ($1.65 trillion), which were higher than their revenue collections between January and October.

China's economic health is directly threatened by the nation's soaring debt levels. It not only raises the possibility of municipalities going into default on their debts, but it also limits the government's capacity to promote economic growth, maintain jobs, and strengthen public services.

As per the report, around 40 per cent of local government expenditure in previous years has been funded by land sales. However, due to the slump in the housing market, this revenue has suffered.

Between January and October 2022, land sales fell by 26 per cent and are on pace to experience their first decline in seven years.

Meanwhile, as per official data, the spending on Covid-related healthcare soared by 13 per cent to reach $245 billion or 1.75 trillion yuan.

Compulsory testing which was largely government-funded has hit treasuries and many cities across the country while maintaining the mandatory negative test have now asked the citizens to pay for the tests.

(With inputs from agencies)

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