The level of local finance determines their role in the commercial sector.
Thirty years ago, in 1994, the introduction of the tax-sharing system gave local governments their first substantial "financial autonomy."
The land concession fees belonged to the localities, indirectly stimulating the local real estate industry and increasing local revenues.
With more money, localities supported enterprises and attracted investment through the "hand of assistance," promoting market development and commercialization, and also bringing rapid growth to China's macroeconomy.
However, now that the real estate market is on the decline, local revenues are the first to be affected.
The reduction in land sales revenue, coupled with increased debt pressure, has also led to a significant increase in non-tax revenue for some localities.
The increase in non-tax revenue implies a decrease in regular taxes, and some localities maintain their income by unreasonably increasing fees and imposing fines frequently, ultimately turning into the "hand of extraction" that restricts the development of small and medium-sized enterprises.
Clearly, the transformation of localities from the hand of assistance to the hand of extraction is not conducive to the establishment of business confidence.
In today's era of consumer downgrading, the importance of localities is increasingly high, and the current market economy urgently needs local assistance.
At this moment, the role played by localities will determine whether the macroeconomy can withstand the second wave of impact.
Looking back at history, China's fiscal system today is mainly shaped by a series of changes in the 1990s.
Among them, the central-local tax-sharing system in 1994 gave localities more financial power and established a more transparent transfer payment system.
In the same year, the "Budget Law" was enacted, which explicitly prohibited localities from borrowing money, but localities circumvented this law through financing platforms such as urban investment after 2009.
By 1998, the commercialization of housing was officially launched, marking the beginning of the most important source of local fiscal revenue, land concession fees; at its peak, land sales revenue accounted for 40% of local income, and its importance is self-evident.
The tax-sharing system of 1994, in a sense, increased the central government's revenue, but the responsibility for fiscal expenditure remained unchanged.
Therefore, to solve the problem of local balance of payments, through general and special transfer payments, as well as land sales revenue allocated to localities, to some extent, solved the fiscal balance between regions.
This balance lasted for decades until the real estate market began to decline, and the balance was broken.
However, before the real estate market began to decline, localities also saw an increase in urban investment bonds.
Since the outbreak of the subprime crisis in 2008, local financing platforms have gradually become an important part of the local revenue structure.
In March 2009, the People's Bank of China and the Banking Regulatory Commission jointly issued a document encouraging localities to support major national investment projects through urban investment companies.
This also opened the prelude to infrastructure investment.
Since then, under the background of implicit local guarantees and the continuous appreciation of land, urban investment companies have expanded rapidly.
By 2010, there were more than 10,000 urban investment companies in China, with a total debt of 14.4 trillion yuan, accounting for 34.95% of the GDP of that year.
In just one year, the total debt of urban investment bonds reached 14.4 trillion, and the risk of urban investment bonds is evident.
From high leverage to de-leveraging, sometimes it only takes a moment.
In 2014, 2018, 2021, and 2024, China has taken a series of measures to try to reduce the risk of urban investment bonds, but it is also trapped by the GDP growth target.
During 2015-2016 and 2019-2020, it was somewhat relaxed, and by issuing bonds to invest in infrastructure, it stimulated economic growth.
It is also the infrastructure that is trapped.
Through more than ten years of "barbaric growth," urban investment bonds, as an important part of local debt, have become increasingly high.
As of this year, the scale of urban investment bonds has reached 50 trillion, higher than the local explicit debt.
If you add the local general debt, special debt, and urban investment bonds, then the total debt scale has reached a hundred trillion.
Through urban investment bonds, localities have stimulated economic growth through infrastructure investment, but the cost of growth is also considerable.
Before the real estate market fell into a downturn, debt was not a big problem for localities.
However, with the expenditure of the new coronavirus in three years and the decline of the real estate market, local land sales revenue has plummeted, and the debt of a hundred trillion has become the sword of Damocles hanging overhead.
At a time when debt remains high, the role of traditional monetary policy regulation is also quite limited.
Currently, China's 30-year government bond yield is only 2.18%, which also means that the macro-level investment return rate is insufficient, ultimately affecting the role of monetary regulation.
Therefore, to solve the debt problem, it is necessary to start from the demand side, restore confidence in real estate, stimulate consumption on the supply side, and boost the confidence of the entire market.
Only when investment and consumption are restored can the expansion and investment willingness of enterprises be increased, and ultimately, fiscal revenue will be increased.
The local debt problem, the consumer end's consumption problem, and the low investment of the enterprise end, all ultimately reflect the structural problems of the macroeconomy.
In the short term, fiscal stimulus is necessary; in the long term, restoring market vitality and confidence may require more changes.
In 2022 and 2023, local land concession fees continued to decline for two consecutive years, and in the first seven months of this year, it continued to decline by 22.3% year-on-year.
When local revenues are insufficient, in addition to increasing non-tax revenue, opening up sources and saving expenditures are also very important steps.
In the first half of this year, the national non-tax revenue increased by 11.7% year-on-year.
Looking at historical data, in years when economic growth faces pressure, such as 2015, 2019, and 2022, China's non-tax revenue achieved growth of 29%, 20.2%, and 24.2% respectively.
However, we must understand that the increase in non-tax revenue implies a decrease in regular tax revenue.
Looking at historical data, in the second half of this year, due to tighter fiscal revenue, the non-tax revenue is likely to increase in the second half of the year.
After excluding the profits handed over by state-owned enterprises and financial institutions, the increase in non-tax revenue mainly depends on administrative fees and various fines.
This point also promotes the role transformation of localities from the hand of assistance to the hand of extraction, which is not conducive to the recovery of market confidence and vitality.
As the real estate market declines, local revenues face pressure to shrink, and they have to increase the income extraction from enterprises and individuals.
This does indeed maintain the balance of fiscal revenue, but the price is also huge.
In the long run, a more robust central-local tax-sharing mechanism may be an inevitable measure to take.
Since the period of the new coronavirus, in order to stimulate market vitality, we have introduced tax cuts and fee refunds.
In recent years, tax cuts and fee refunds have indeed relieved a lot of burden on small and medium-sized enterprises and individuals.
However, compared with the impact on the market, these reliefs are not enough to a certain extent.
Only by truly making up one's mind to focus on consumption for economic growth and to distribute the mechanism on the income end can we solve the current local debt problem in the long run.
How to divide the pie determines how big the pie can be made.
