Key Takeaways:
- China’s rapid adoption of EVs is unintentionally eroding gasoline tax revenues needed for highway maintenance
- A central government pause on issuance of securities backed by data assets highlights the ongoing struggle to control local government debt
image credit: Bamboo Works
China’s centrally planned economy is renowned for its meticulously crafted five-year plans and top-down policy directives. But even the most carefully orchestrated initiatives can spawn unexpected headaches. We’re currently seeing this play out in two different arenas that share a common theme of unintended financial consequences. First, China’s booming electric vehicle (EV) market is quietly pulling the rug out from under highway maintenance funding. Second, a sudden surge in an unusual new class of asset-backed securities — backed by data — is sparking fears that local governments are finding a new way to mask their debt.
We’ll start with the rapid rise of EVs, which now account for more than 60% of new vehicle sales in China. This boom was heavily policy-driven. Over the last decade, Beijing has sought to convince the world it was doing more than anyone else to address climate change. Promoting EV adoption on the demand side was an obvious strategy, supported initially by substantial government subsidies.
However, this success has created an unintended side effect for the thousands of kilometers of non-toll highways China has built over the last three decades. These roads rely heavily on gasoline taxes for maintenance funding. With gasoline consumption coming down, there’s suddenly less money available to fix roads. Meanwhile, the electricity powering these new cars is highly regulated, cheap, and lacks equivalent taxation.
We think officials likely knew this situation was coming, but there isn’t a clear backup plan to take up the slack. Eventually, the government will have to introduce new taxes, but we believe they’ll wait as long as they possibly can. Consumer confidence in China isn’t strong right now, and raising costs could be counterproductive. Furthermore, EV manufacturers are now vastly more important to the Chinese economy than legacy combustion-engine automakers.
Taxing electricity across the board seems unlikely, as power prices are a sensitive topic for consumers. Instead, a sensible solution might be an annual tax for the use of an EV, rather than a point-of-sale fee that could dampen demand in the current climate of consumer caution. Until then, the gap in road maintenance funding remains a looming challenge.
Slamming the brakes on data assets
While physical roads face funding shortages, a much more abstract issue is brewing in China’s financial markets. Since last year, local governments and companies have been allowed to use their data as an asset with real value to back a new class of asset-backed securities (ABS). Yet, only a year after launching, the central government is suddenly slamming on the brakes.
The core concern here is that local governments are using these data-backed securities as a way to disguise their debt. From a financial standpoint, this raises massive valuation questions. Who determines that a local government’s estimate of future revenue streams from a specific dataset is realistic and not highly exaggerated? In the U.S., rating agencies act as independent third-party referees — even if they sometimes do a horrible job. But that independence is lacking here. Given that local governments have a well-demonstrated ability to use off-balance-sheet tricks, investors ought to be highly cautious.
Retail investors might assume that because these ABS are tied to the government, they’ll always get their money back. But the central government is rightly concerned that things might go wrong, potentially hurting individuals and disrupting social stability — Beijing’s number one priority.
We’re highly skeptical about the future of this whole data securitization push. In the West, it’s easier to sue businesses, and the legal ownership of data — especially personal information — is a much more sensitive issue. There are some cases in the U.S. where companies have securitized music royalties, patent income, and trademark licensing revenues. But those are much clearer assets. You can look at years or even decades of revenue history for a patent or franchise fee and get a decent sense of where it’s headed. The legal environment is stronger, and the historical data provides comfort to investors. China’s data securities lack that tested, historical foundation. Whether it’s subsidizing an EV boom that inadvertently drains road funds or allowing creative local governments to securitize untested data, it’s clear that pushing the boundaries of policy inevitably brings complications that even the best five-year plans struggle to predict.
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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