Time to ‘smash iron pots, sell the steel’ for local governments in China

Local governments in China are to be allowed to sell idle assets, including property, to raise funds for much-needed projects.

Local governments are under financial pressure, owing to sharply reduced land sales and Beijing's ongoing crackdown on risky lending and related financial engineering. This has left them struggling to fund some projects and meet repayment commitments on debt.

The 'smash iron pots, sell the steel' strategy

This new initiative is part of a broader 'smash iron pots, sell the steel' strategy. This refers to a policy of selling off assets to plug fiscal holes. It was first used in the early 1990s in the context of privatizing state-owned enterprises.

Under a government circular issued at the start of June, local authorities are allowed to sell the public and commercial properties they still own, idle land and 'off-book' assets used to dodge debt limits.

The new directive is a significant change, because authorities have previously been expected to retain ownership of assets to underpin future revenue streams. But Beijing now accepts there have to be ways to raise funds from monetizing their vast property holdings, which have come under strain with falling land sales caused by the COVID-19 pandemic and the ongoing property market downturn.

The circular also explicitly permits local authorities to sell their stock holdings in publicly listed companies, another previously restricted avenue for raising funds.

The proceeds of the asset sales can be used to fund a range of needs, including servicing existing debt, major infrastructure projects and public services.

Local governments will be allowed to sell off their surplus property over the next five years.

However, it is not likely that residential housing will be sold off, even though the government has large stocks of this, because authorities are committed to retaining social stability, which is a key policy goal.

The policy is based on the premise that the government should not own assets that could be more efficiently managed by companies.

The state-run media has been encouraging local authorities to implement the new policy, and many are expected to do so. It is a sign of the Chinese government's increasing focus on fiscal discipline and its willingness to allow local governments to raise funds from new sources.

However, some analysts are concerned that this could lead to a fire sale of assets, which could depress prices and lead to losses. They also worry that local governments may be tempted to sell off assets that are essential to providing basic services to citizens.