China’s local government debt crisis adds chill to success of Harbin’s ‘ice city’ tourism boom

The region has struggled with declining industrial profitability and a net population outflow, while its revenues – mainly generated from land sales – have taken a dive to exacerbate its financial problems.

“Property has also become a lifeline for government finances, particularly at the provincial level. At the market’s peak in 2021, almost half of total local government revenues came from land sales to developers; this revenue is used to deliver government services, fund infrastructure projects and service debt,” Moody’s Analytics said on Friday.

Dwindling sales and falling property prices saw land sale revenues fall by almost a quarter in 2022, and by a further 13 per cent in 2023, Moody’s Analytics added.

A slowdown of fixed-asset spending by local governments, especially those financially weak, could affect their construction related earnings, according to an analysis by Fitch Ratings.

The US rating agency’s analysis on the 2024 budgets of 12 regions in China, that have been reportedly instructed by Beijing to postpone or suspend certain state-led infrastructure projects to curb debt risks, showed that their planned capital expenditure would decline by 23 per cent from 2024.

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“Last year, the central government identified these [12] provinces and cities – which are directly under the administration of the central government – as having local government financing vehicles (LGFVs) with a high risk of defaulting on their debt obligations,” Fitch Ratings said last week.

LGFVs are created by local governments to aid off-budget financing, especially for infrastructure spending and have proliferated since 2008.

Spending curbs have been taking place in Harbin, including infrastructure projects that are supposed to support the 2025 Asian Winter Games.

The second phase of a mass transit network has also been postponed, the city government said at the end of January, because its debt level did not meet the requirements set by the State Council.

The annual Ice and Snow Festival, which usually takes place between December and February, includes grand and detailed ice sculptures that are major attractions for tourism.

And while the local government touted the success of its tourism industry, the provincial government acknowledged in its 2024 work report that there were insufficient “high quality” industrial projects to drive economic growth.

“There are still outstanding debts to the public. Affected by multiple factors, the gross domestic product growth rate is lower than the national average, and industrial and fixed-asset investment above designated size have experienced negative growth,” the report released in January said.

Analysts are sceptical that the tourism growth over the Lunar New Year break across China signalled a broader consumption recovery that is key to Beijing’s objective to transition to a demand-centred economy.

“While the strong Lunar New Year service spending data beat analyst expectations, they do not change the fact that the other part of the economy, the more investment-driven and commodity-intensive industrial activities, remained below par,” said analysts from Bank of America last month.

“In our view, a solid consumption rebound would require the restoration of consumer confidence amid an improving labour market and housing market.”

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And analysts at Standard & Poor’s expect most local governments to face economic and revenue challenges this year because of a muted property market recovery.

“These revenue hurdles will necessitate careful spending decisions by local governments,” they said on Sunday.

“Governments will likely be cautious about withdrawing their fiscal support from the economy too rapidly.