China faces biggest fiscal challenge since 1981: Deutsche Bank

Total fiscal revenues are likely grow just 1% in 2015 year-on-year

China's fiscal revenue growth is set to hit a three-decade low in 2015, Deutsche Bank said in a report, complicating policymakers’ efforts to rein in runaway local government debt without crippling the broader economy.

Total fiscal revenues will likely grow just 1 per cent in 2015 year-on-year, the slowest pace since 1981, Deutsche Bank predicted, and forecast local government revenues to fall 2 per cent — the first contraction since 1994.

Land sales, which account for over a third of local government revenues, may fall 20 per cent, the report said.

Local governments, mostly barred from directly taking out loans or issuing bonds, have managed to rack up some $3 trillion in debt via opaque local government financing vehicles. Much of the funds have been invested in questionable infrastructure and real estate projects.

With a slowing economy - in particular sliding land prices — hitting revenues, Deutsche Bank economists Zhiwei Zhang and Andrey Shi see a crisis looming.

"China will likely face the worst fiscal challenge since 1981," they wrote in a research report published Monday.

"We believe this is the most important risk to the economy and one that is not well recognized in the market."

The government needs to find ways for local governments to raise much needed funds to bankroll key social services while maintaining discipline on spending - a difficult economic and political balancing act.

China's annual economic growth likely slowed to 7.2% in the fourth quarter, the weakest since the depths of the global crisis, a Reuters poll showed. Yet borrowing rates remain relatively elevated despite previous rounds of cautious monetary easing.

"The economy faces relatively big downward pressures and local resistance (to reforms) is strong," said an influential economist who was involved in revising the budget law, speaking on condition of anonymity.

"Local officials have been complaining about their debt burdens already and they will cry louder if their financing powers are stripped."

Analysts fear slower economic growth, and reduced options for refinancing following crackdowns on off-balance sheet lending, could push stretched local governments to the wall. Such a development risks squeezing China's economy further, as rising bad loans make banks less willing to lend.