China mired in debt crisis fueled by local government borrowing

Financial news organizations in China are monitoring a growing debt crisis stemming from excessive borrowing by local governments, often used to pay off existing debts. This issue has not been monitored by the Chinese central government because local governments are not required to report funds raised through Local Government Financing Vehicles (LGFVs).

China’s Ministry of Finance acknowledged that by the end of 2021, the local government debt balance had reached around $4.81 trillion. While this figure is within approved limits set by the Chinese government, it excludes unreported local debt, primarily LGFV debt which includes loans and bonds, which reached $6.91 trillion in mid-2020. , according to a report by Kaiyuan Securities.

How serious is China’s debt crisis? Diana Choyleva, chief economist for Enodo Economics, provided her observations in an op-ed for Nikkei Asia. She thinks “China’s local government debt should be the real concern.” During the first quarter of 2020, collective debt had reached 275% of GDP. This contrasts sharply with 2010, when Chinese debt reached 178% of GDP. Ultimately, the biggest threat to the stability of the Chinese economy is its growing debt.

LGFVs explained

LGFVs were companies originally set up by municipal or provincial governments to finance construction projects and public works, and circumvent Beijing’s ban on their bond issuance. Bonds sold by LGFVs are one of the ways local authorities borrow money to increase spending without including it in their official balance sheets. Yet the debt carries an implicit government repayment guarantee.

LGFVs flourished after the 2008 global financial crisis as a way to fund China’s infrastructure building frenzy and were encouraged by the central government. As a result, “China’s debt has ballooned by around 20% a year since then, eclipsing nominal gross domestic product growth,” Choyleva said.

Implicit local government debt has become a concern as there is no official data on the total debt sold by LGFVs, making them difficult to monitor.

Chinese cities plagued by excessive debt ratios

Last October, Datapower and Tencent Finance jointly launched a “City Debt Ratio Ranking” report indicating that the budget debt ratio was calculated by combining the explicit and implicit debts of a local government, i.e. the debt balance + LGFV bonds / tax revenue. By international standards, the prevailing risk warning line for local government fiscal debt ratio is 80-120%.

The survey sample included 86 first- and second-tier cities in China. In 2020, 85 cities had debt ratios above 100% and 75 had doubled their debt ratio since 2019. Shanghai reached 122% while Beijing and Guangzhou both reached over 200%. The city with the highest debt ratio was Guiyang at 929%. Shenzhen was the only city with a debt ratio below 20%.

According to a report by Kaiyuan Securities, by mid-2020 the implicit debt of local governments had reached $6.91 trillion, far higher than the explicit debt of $3.77 trillion, and the combined debt ratio of two was nearly 250%, which is more than twice the alert line.

This alarming figure is consistent with the report by Moody’s, a leading international rating agency. The report notes that although the Chinese government never announced the global implicit debt of the LGFVs, it is feared that the real hidden local debt has ballooned to $7.1 trillion, equivalent to 44% of China’s GDP. China.

In 2021, a study published by the Shanghai University of Finance and Economics included a prediction of the annual maturity if China took into account the implicit debt arising from LGFV bond costs. Titled “Analysis and Forecast of China’s Macroeconomic Situation,” the study suggested that the annual maturity of outstanding debt will exceed $690 billion from 2021 to 2026. This included maturities of $920 billion. in 2021 and $880 billion in 2023 and 2024.

The report states: “Currently, many local governments can only continue to repay their debts by borrowing new money to pay off old ones. Once the growth rate of the local economy and tax revenue declines and cannot match the growth rate of the debt burden, the risk of public debt will accumulate rapidly.

According to the Kaiyuan Securities Research Institute, in 2020, the proportion of LGFV bonds raised to “borrow new debt to repay old” reaches 85%.

Local hidden debt

In January, the CCP’s official media Xinhua estimated that in the first quarter of 2022, Chinese local governments are expected to issue special bonds totaling $230 billion. However, this estimate may be low.

China’s Economic Reference News provided the following quote from Mr. Tang LinMin, a researcher with China International Futures Corporation. He said, “At present, many places have issued local bond plans in 2022, and the proposed issuance scale in the first quarter is at least $110.4 billion, among which the scale of the new special bonds is at least $78.8 billion. Based on these figures, the scale of local bond issuance in the first quarter is expected to reach around $270 billion, close to where it will be in 2020.”

In an interview with The Epoch Times, Professor Zhang, a Chinese economist, said China is running out of money on all fronts. The economy is bad, the international situation is bad and the expenses are still enormous. Although issuing bonds is likely to provide relief, its effectiveness is uncertain. Adding to this uncertainty is the CCP’s lack of transparency about how it spends the money.

The Epoch Times also talked about the CCP’s reliance on ties to Xia Yifan, a Japanese commentator. Xia said that the credit guarantor of the bonds is the CCP at the local government level. But local governments lack credit to provide people. They also lack the sophistication to know what to do with their money, what they are going to achieve, how much they hope to earn, how they are going to pay it back, etc.

Like Professor Zhang, Xia believes that issuing bonds is likely to relieve local governments, but this approach is not seen as a reliable economic stimulus. Instead, it allows corrupt officials to compound China’s unfavorable debt ratio, without consequence.

During a Dec. 22 interview with “Political and Economic Frontline,” economist Cheng Xiaonong noted that since the housing bubble burst, China has begun to rely on debt to grow the economy. He said local government revenues from land sales have declined while their debt continues to rise. These local entities may go bankrupt unless the central government provides more subsidies. But the CCP “has no money in hand.”

Kane Zhang contributed to the article.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.


Robert P. Matthews