cross-posted from: https://lemmy.sdf.org/post/56097731

The country’s latest five-year plan includes measures to build up bailout funds, but it is unclear where the funding will come from.

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China’s tax revenue goes to the central government, which then allocates funds to regional governments or reserves it for central government initiatives. Yet local governments still carry the cost of the majority of public services such as healthcare, schools, and public safety.

Luckily, there is a convenient loophole: local governments do not have to share non-tax revenue gained through land leases and real estate revaluations. Moreover, auditors brought on to determine land asset values have had to work on behalf of the same local government that controlled their ability to legally remain in business. In turn, the assumption became that every new housing complex on local government balance sheets would soon be a bustling metropolis — and so they were valued as such. As long as housing prices went up and construction of new homes continued, the money would keep flowing.

The party ended between 2020 to 2022, when overleveraged real-estate developers ran out of money for construction and stopped hundreds of uncompleted projects which had already been sold. A survey conducted in early 2022 found 45 percent of homebuyers were waiting on unfinished properties. Many buyers were left with mortgages for homes that didn’t exist, and consumer trust in purchasing housing evaporated.

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In summer 2022, consumer frustration transformed into protests in central China. That same summer, several Henan banks experienced a bank run, prompting more regional protests by depositors. In parallel with the flagging housing market, a rural banking crisis had begun.

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The 15th Five-Year Plan [...] gives direct instructions to prepare bailout funding by refilling The Financial Stability Protection Fund (金融稳定保障基金) — created in 2022 to allow direct lending between the central bank and struggling enterprises in cases where failure could create a domino effect devastating the economy; and the Deposit Insurance Fund (存款保险基金), set up in 2015 to cover all deposits made at banking institutions within China, including rural credit cooperatives.

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How these rainy-day funds will be financed is not yet clear. The 15th Five-Year Plan directs local governments to curb debts, forcing them into ongoing austerity mode. Even prior to these instructions, public employees such as schoolteachers, bus drivers, and the like, have had to deal with salary cuts. Fines and penalty fees are increasing as regional governments look for different sources of revenue. Local police offices have taken to crossing into other jurisdictions to extract fines, a practice so rampant Netizens have termed the practice “offshore fishing”.

It is unclear what revenue options are available to local governments without a major overhaul of the national tax revenue distribution system.

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An economic crunch will not mean China will stop being a major global power [...] China will still have the world’s largest population and second largest economy.

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But economic shocks create aftershocks across the world, and even after a decade of rising trade tensions the U.S. and China are still among one another’s top trading partners.

We should all take note that China’s economy is in a tenuous situation right now. The 15th Five-Year Plan is preparing for a financial crisis. We should be mentally preparing for one too.