China seizes up to $220b of unspent local government budgets; huge underspend worsens economy

BEIJING (REUTERS) - Angry Chinese authorities have seized up to 1 trillion yuan (S$220.4 billion) from local governments who failed to spend their budget allocations, sources said, as Beijing seeks ways to stimulate economic growth which is at its slowest for 25 years.

The huge underspend, linked to officials' reluctance to splash out on big-ticket projects while authorities crack down on corruption, supports the argument of some economists that Chinese state investment has grown too slowly this year.

"In the past, local governments had asked for the money. Money was given, but no one acted," said one of two sources, both of whom are close to the government.

"Investments were not realised, and the money will be reallocated," added the source, an economist. He did not elaborate on how the funds would be spent.

The repossessed money will pay for other investments, said the sources, as economic growth looks increasingly likely to fall below 7 per cent.

Lacklustre spending growth could be especially costly for China, as higher investment is seen by many as the best way to shore up activity, at least in the short-term, even if it does put deeper reforms on the back burner for now.

One trillion yuan of unspent funds is equivalent to about 6 per cent of China's projected total government spending for 2015.

The Finance Ministry was not immediately available for comment when contacted by Reuters.

China's economy has had a difficult year. Unsteady global demand and a wobbly Chinese housing market are expected to drag full-year growth to 7 per cent in 2015, though many analysts suspect the true figure to be much lower.

A near 40 per cent drop in China's stock market in the summer and a shock two percent devaluation in the yuan further roiled investors and policy makers.

The devaluation sparked accusations that China had started a round of competitive international currency devaluation.

China, which denies those allegations, has since been at pains to support the yuan, and some government economists said Beijing had decided the best way to stabilise the currency was by steadying the economy through higher fiscal spending.

"If economic growth stabilises, the pressure on capital outflows and the exchange rate could be eased," said an economist at a commercial bank, who met Premier Li Keqiang to discuss China's policy over the summer. "The central government is likely to step up spending."

In another sign China is prepared to crank up fiscal stimulus, the powerful economic planner, the National Development and Reform Commission (NDRC), held an internal teleconference on Monday to discuss the ways to stabilise investment growth.

Measures to be taken include dispensing a second round of financing for unnamed construction projects by September, and ensuring that funding for projects paid for by the central government will be ready in the next two weeks.

An initial list of 13 public-private partnerships in project financing has also been announced, the NDRC said.

To the surprise of some in Beijing, China's unprecedented anti-graft campaign that has felled a powerful ex-domestic security chief, among others, has hindered investment.

While the campaign has been a hit with the public, it has also had the unintended consequence of scuppering spending as fearful officials eager to stay out of trouble resort to early retirement or dither over approving major projects.

That has annoyed Beijing, which has repeatedly threatened to punish procrastinating local governments by recalling their unspent budgets. HSBC Bank estimated in May that China had 3.8 trillion yuan of unused fiscal funds carried over from previous years.

Due to the crackdown (on corruption), most local officials have accomplished nothing," said the second source, who has ties to the leadership.

Official data showed investment accounted for slightly more than a third of China's economic growth in the first six months of this year.

Data over the weekend pointed to stubborn weakness in China's economy. Growth in investment and factory output both missed forecasts in August, suggesting China needs to roll out more policy support to lift activity.