I recall once local tax officials of a small city along China’s east coast being most disconcerted when they walked into a Western factory to find its equipment no longer in place, its operators no longer operating. Instead, tax officials found a long table with a handful of assembly workers piecing together simple mechanisms. The manufacturing equipment had long been moved out. Clearly, they knew it was going to be difficult to gain the tax revenues they had projected would be paid by the manufacturer.

Now, with the Central Government pushing its highly touted stimulus plan to give a boost to infrastructure development and to domestic consumption, local governments are expected to pitch in. However, local governments have found themselves cash-strapped as well: company closures, a lack of land sales, and most of whatever funds they cull going to Beijing to be disbursed to poorer areas (they don’t call it “central” government for no reason).

The Wall Street Journal recently reported:

China’s tax system funnels most revenue to the central government, with provincial and muncipal authorities left to handle the bulk of spending on services such as education and health. While Beijing sends money to poorer provinces, most local governments still rely on extraordinary fundraising measures to make ends meet. Land sales have been a big source of money but have started to dry up as the property market declines.

Now, local governments will be moving into new territory with the issuance of bonds to subsidize the expenditures Central Government has proposed.

National governments usually end up being responsible for debts accumulated by local authorities, which is one reason why Beijing plans tight controls to keep local officials from borrowing beyond their means.

I don’t think Central would be happy paying some of those debt-backed KTV bills.

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