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ITT: Nobody knows what they're talking about. People need to stop assuming all governments work identically and that numbers are comparable in any way. In Chin

ITT: Nobody knows what they're talking about. People need to stop assuming all governments work identically and that numbers are comparable in any way. In China local governments COLLECTS NO TAXES, thus they fund all their expenditures by debt. In 2 years there's going to be widespread tax reform and all this debt will be wiped away.

icebraining 8y ago
Who lends money to a local government which has no revenue?
- seanmcdirmid 8y ago
  They make money by selling land, and they also get a smallish cut of the VAT (replacing business taxes they used to get). They also outsource their debt spending to locally controlled SOEs who theoretically should be able to make money by being an state-owned enterprise. Also, they make the state-owned banks lend to them regardless, at a low interest rate since there is an implicit garauntee they won’t default. It isn’t really sustainable. It is only a matter of time before China introduces a property tax to fund local governments.
  - paradite 8y ago
    According to Wikipedia local government collects taxes, including property tax: https://zh.m.wikipedia.org/wiki/地方税 https://zh.m.wikipedia.org/wiki/地方税
    - seanmcdirmid 8y ago
      ATM, property taxes only have limited rollout in Chongqing and Shanghai on second properties. See https://www.bloomberg.com/gadfly/articles/2018-03-08/don-t-bet-your-house-on-china-s-property-tax-just-yet https://www.bloomberg.com/gadfly/articles/2018-03-08/don-t-b....
- bduerst 8y ago
  No tax revenue != no revenue. They also have assets.
nabla9 8y ago
Good point. Government debt can be understood as delayed taxation. If private sector has higher productivity, delaying taxation may be the best option for overall growth when debt to GDP is acceptable. Other thing that totally changes the discussion is if the debt in local currency or in foreign currency.
paradite 8y ago
From my understanding and reading, local government does collect taxes, though not much. Links in Chinese: 1. https://zh.m.wikipedia.org/wiki/地方税务局 https://zh.m.wikipedia.org/wiki/地方税务局 2. https://wapbaike.baidu.com/item/地方税/4480452?fromtitle=地税&fromid=6896193 https://wapbaike.baidu.com/item/地方税/4480452?fromtitle=地税&fro...
jeffreyrogers 8y ago
My understanding is this is partly because they had a hard time collecting taxes in the past due to having weak institutions, so local governments raised money from external sources in return for giving those who gave them money a cut of the profit. As China develops it starts replacing these ad-hoc arrangements with more formal ones like you see elsewhere.
baursak 8y ago
This, but also for central government debt, the government is the issuer of its own currency. As long as the debt is denominated in the same currency, the government can never become insolvent on its debt. The real constraints are always real resources and real economic activity, the lack of which would cause inflationary pressures. Here's an insightful bit in US context, but it's much the same for China: https://youtu.be/pex89N9Oqog https://youtu.be/pex89N9Oqog

icebraining 8y ago

Who lends money to a local government which has no revenue?

seanmcdirmid 8y ago
They make money by selling land, and they also get a smallish cut of the VAT (replacing business taxes they used to get). They also outsource their debt spending to locally controlled SOEs who theoretically should be able to make money by being an state-owned enterprise. Also, they make the state-owned banks lend to them regardless, at a low interest rate since there is an implicit garauntee they won’t default. It isn’t really sustainable. It is only a matter of time before China introduces a property tax to fund local governments.
- paradite 8y ago
  According to Wikipedia local government collects taxes, including property tax: https://zh.m.wikipedia.org/wiki/地方税 https://zh.m.wikipedia.org/wiki/地方税
  - seanmcdirmid 8y ago
    ATM, property taxes only have limited rollout in Chongqing and Shanghai on second properties. See https://www.bloomberg.com/gadfly/articles/2018-03-08/don-t-bet-your-house-on-china-s-property-tax-just-yet https://www.bloomberg.com/gadfly/articles/2018-03-08/don-t-b....
bduerst 8y ago
No tax revenue != no revenue. They also have assets.

nabla9 8y ago

Good point. Government debt can be understood as delayed taxation. If private sector has higher productivity, delaying taxation may be the best option for overall growth when debt to GDP is acceptable. Other thing that totally changes the discussion is if the debt in local currency or in foreign currency.

paradite 8y ago

From my understanding and reading, local government does collect taxes, though not much. Links in Chinese: 1. https://zh.m.wikipedia.org/wiki/地方税务局 https://zh.m.wikipedia.org/wiki/地方税务局 2. https://wapbaike.baidu.com/item/地方税/4480452?fromtitle=地税&fromid=6896193 https://wapbaike.baidu.com/item/地方税/4480452?fromtitle=地税&fro...

jeffreyrogers 8y ago

My understanding is this is partly because they had a hard time collecting taxes in the past due to having weak institutions, so local governments raised money from external sources in return for giving those who gave them money a cut of the profit. As China develops it starts replacing these ad-hoc arrangements with more formal ones like you see elsewhere.

baursak 8y ago

This, but also for central government debt, the government is the issuer of its own currency. As long as the debt is denominated in the same currency, the government can never become insolvent on its debt. The real constraints are always real resources and real economic activity, the lack of which would cause inflationary pressures. Here's an insightful bit in US context, but it's much the same for China: https://youtu.be/pex89N9Oqog https://youtu.be/pex89N9Oqog