China’s Economic Shift

China’s decision to grant local governments more autonomy in the late 70s boosted competition and investment, leading to a housing boom and significant land sale revenues. However, in light of the ongoing housing crisis, these governments have transitioned from being supportive entities to becoming exploitative forces, according to Nomura. This shift necessitates urgent fiscal reforms to address the shocks currently affecting the economy.

Historical Context

Reform and opening initiated by Beijing in the late 1970s fostered fiscal federalism, empowering local governments and facilitating market development. This autonomy has been a driving force behind China’s growth over the past four decades.

Revenue Peaks and Dips

At its peak in 2021, land sale revenues surged to RMB8.7 trillion, representing 7.6% of GDP. However, the current housing crisis has severely impacted these revenues, forcing local governments to desperately seek funds for operational costs and salaries.

Decline from ‘Helping Hands’ to ‘Grabbing Hands’

Nomura notes that many local governments, once viewed as ‘helping hands’ fostering growth, have evolved into ‘grabbing hands.’ They are now imposing steep fees, frequent fines, and rigorous tax collection, undermining the very foundations of China’s economic achievements.

Call for Reforms

The analysts argue that addressing the behavior of these ‘grabbing hands’ is crucial. The central government needs to provide direct funding to stabilize the property market and enhance fiscal transfers to local authorities. This would be the first step towards longer-term reforms, such as streamlining the fiscal system, linking transfers to local growth, and reinstating the rule of law to revitalize fiscal federalism in the post-housing crisis landscape.