China’s First City-Level Restructuring Shows Effect of Slowdown

(Bloomberg) -- A city in China’s northeast rustbelt became the latest casualty of the economy’s slowing growth, with local media and analysts reporting it recently began a fiscal restructuring.

Hegang City government said recently that it had canceled a plan to recruit staff because it was undergoing a fiscal revamp, according to a statement reported late last month by the Securities Times, which is run by the People’s Daily. That statement has since been deleted, local media said, and it couldn’t be found on the local government’s website Thursday.

Huachuang Securities Co. Ltd. picked up on the news this week, saying the case marked the first time in China that a municipal-level government has been put into restructuring. The unusual step indicates authorities ran out of other options to address their financial problems, the analysts including Zhou Guannan wrote in a note late Wednesday. 

The move lays bare some of the challenges facing China’s local governments, which are expected to spend more on infrastructure to support the economy but must also grapple with slowing growth and tax cuts hitting revenue, high existing debt levels, and shrinking populations in some areas. 

“Fiscal restructuring is the last thing local governments would do, and it shows a deep imbalance between income and spending,” the Huachuang analysts wrote. “They would not choose to do so as long as they can maintain a certain scale of general and government fund income through methods such as fines, more land sales, or in extreme cases, inflating fiscal revenue figures.”

Hegang, in the economically weaker northeastern province of Heilongjiang, relies heavily on money transferred from higher-level governments to pay for spending. In 2020, transfer payments of 10.5 billion yuan ($1.6 billion) were worth about two-thirds of total spending that year, a report from the city’s budget bureau showed. 

The city’s general fiscal income fell 7.8% to 2.3 billion yuan that year, while government fund revenue, which mostly comes from land sales, was only 211 million yuan. 2021 data is not available yet. 

An official who answered the phone at the city government said that responsible officials were unavailable to comment as they were all in a meeting, and she couldn’t provide a fax number as it was her first day at work. There was no answer to an email requesting comment. 

During a restructuring, local governments must cut expenditure on infrastructure projects, not spend any money on public hospitality events, stop hiring new employees, sell assets and tighten tax collection, according to rules published in 2016 by the State Council, which is China’s cabinet. Also at stake is local officials’ careers, as they will be judged on how the debt issues are dealt with, held accountable for risks, and could be denied promotion during the overhaul.

Before Hegang, two sub-city level areas in Ziyang City in southwest China’s Sichuan province also went through such an overhaul in 2018, the Huachuang analysts wrote. All three governments ran into trouble because the growth of the local economies fell behind the rate of debt accumulation, with fluctuations in the land market denting government fund revenue, they added.

Hegang was rich in coal, copper and other minerals but it was classified as a “city with depleting resources” in 2011 after decades of mining. The city’s population dropped by nearly 16% to less than 900,000 over the 10 years through 2020, according to the latest national census. 

The city made news headlines in China in 2019 when local media reported that a one-bedroom apartment there cost as low as 150,000 yuan, which would have been enough to buy just one square meter of a home in downtown Beijing.

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With assistance from Bloomberg