Both operating revenue and operating expenditure across local and regional governments increased slightly by 0.9% year on year from January to June 2024, demonstrating that governments’ efforts to control expenditure growth is starting to pay off, according to a recent report.

This comes despite the fiscal performance of China’s local and regional governments maintaining a weak trend in the first half of 2024, according to Fitch Ratings’ latest report on China’s public finance.

Operating revenue of local and regional governments consists of both tax and non-tax incomes. With tax revenue at the national level falling by 5.6% in the first half of the year because of the continuing preferential tax policies, the increase in operating revenue, the report points out, is attributed to an increase in the non-tax income.

Going forward, operating revenue, Fitch predicts, will have a modest increase in the second half of 2024 following the phaseout of preferential tax policies and the introduction of a series of fiscal reform arrangements agreed at the Chinese Communist party central committee’s third plenum last month.

On the other hand, first-half capital revenue, mainly from land sales, has continued to decline, by 17.4% compared with the same period last year as the real estate property market has seen no pick-up. Accordingly, first-half capital expenditure also declined by 18.2% year on year. Considering this, the debt-financed capex growth, Fitch believes, will not achieve the growth target of 15.5% set by the central government at the beginning of the year, unless stronger central transfers happen in the second half.

Additionally, local and regional government issuance of special purpose bonds has also experienced a decrease, 35%, according to data from China’s ministry of finance. This is attributable to, Fitch reckons, alternative funding sources provided by the central government’s sovereign bonds and the tight control on financially weaker regions’ investment growth. Both are means to control and resolve the off-balance sheet debt accumulated by local government financing vehicles (LGFVs).

Since September 2023, China has introduced a debt swap programme, through which the central government issues sovereign debt to swap for LGFV debt. The first phase of this programme involves the central government raising 1 trillion yuan (US$139.26 billion), with more expected in the coming years.

From another angle, the control of LGFV debt has started to pay off as the size of the interest-bearing LGFV debt for nine provinces, including Inner-Mongolia, Heilongjiang, Jilin, Guizhou and Yunnan, has been reduced in 2023. In other words, they are digesting their debt stock. These are also the most-indebted and financially weak provinces in China.