China Goes Old School As Economy Slows

China is throwing everything at the slowing economy: accelerating reforms, easing monetary policy, using fiscal stimulus and old school investment.

China Pledges To Cut Red Tape, Open Financial Sector - And Spend $40B On Railways - To Boost Slowing Economy

Diplomat: China’s Mounting Fiscal Problems

One reason that the leadership is in such a bind with local governments is that fiscal imbalances between the central and local governments have still not been corrected. Local governments have been desperate for sufficient revenue to cover their massive expenditures on social services and infrastructure and continue to face no reprieve. The recent fiscal reform appears to have even skewed revenues a bit more in favor of Beijing, as service enterprises will switch from paying the business tax, which generally goes to local governments, to the VAT tax, which is transferred to the central government.

Another reason why local governments were allowed to use LGFVs is because the attempt to expand the municipal bond markets was insufficient. Local governments rolled out 400 billion RMB in 2014, which proved insufficient to finance local government projects. Land sales have also slowed, resulting in smaller revenue intake.

China needs additional fiscal reform, particularly with redistribution from central to local coffers, but this is unlikely to happen as both central and local government are pressed for funds to stimulate growth and implement reforms. Certainly the leadership has a challenging road ahead. The reversal on local government debt channels is just one harbinger of obstacles to come.

The slowed rollout of real estate taxes isn't helping.