March 7, 2024
BEIJING – China will roll out measures to keep runaway local government debt under control, and these include shaming officials and companies found guilty of hiding new arrears, as well as strengthening oversight of its municipalities, provinces and autonomous regions.
Supervision will also be tightened to ensure that local officials come up with repayment plans, which will be enforced, said Chinese Finance Minister Lan Foan on March 6, as he promised to keep under control the risk that heavy local government debts pose to the country’s financial system.
While the problem of local government debt is not new in China, it became more acute in 2023, as spending rose and revenues fell. The Finance Ministry recognised in its draft budget released on March 5 that a better long-term mechanism for “guarding against and defusing hidden debt risks” was needed.
The ministry’s aim is to prevent a situation where local governments are paying off debts on one end and raising new debt on the other, Mr Lan said at a press conference about China’s economic and financial plans held during the country’s annual parliamentary meetings, or lianghui.
Beijing will investigate and punish those accountable for new hidden debts, the minister added. “The results will be made public, and we will make examples out of these offenders,” he said.
Mr Lan also said that, over the past year, the Finance Ministry has “paid extra attention to local government debts, and with some efforts, has kept the problem under control”.
China’s growing municipal borrowing, especially off the books, has been highlighted by analysts and economists in both local and international media as a potential runaway problem that could severely cripple the country’s financial system.
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According to the latest draft budget released by the Finance Ministry on March 5, outstanding local government debt totalled 40.7 trillion yuan (S$7.68 trillion) in 2023 – within the budget approved by the National People’s Congress, the country’s top legislature.
But it is China’s hidden debts that are worrying policymakers.
The International Monetary Fund projected in February 2023 that China’s local government debt burden is growing faster than in previous years and taking up an increasingly bigger share of its gross domestic product (GDP), raising concerns about potential defaults.
In 2023, local government debt burden is expected to increase by 9 percentage points, as a ratio of GDP, four percentage points higher than the increase in 2022. The increase was 2 percentage points in 2021.
The arrears are indirectly incurred by the government through entities controlled by the authorities.
There are no official figures for local governments’ hidden debt, but a report by Moody’s, a rating agency based in the United States, estimated in 2023 that debts run up by local governments’ financing vehicles, or LGFVs, totalled a staggering 60 trillion yuan.
These are firms that are owned by any combination of local governments, state-owned enterprises and private companies to help finance public projects, mainly infrastructure, by raising money through the sale of bonds.
Local governments have been under pressure by Beijing to deliver GDP growth, which infrastructure spending contributes to.
The firms have fallen on hard times as city government revenues dry up with the decline of land sales because of a regulatory clampdown on the property market and a surge in pandemic spending in recent years.
In 2023, local government revenue fell 10.1 per cent to 6.63 trillion yuan, mainly owing to a drop in land sales proceeds, the draft budget noted. Declining government revenue affects the LGFVs’ ability to pay back creditors who have bought their bonds through banks.
The primary creditors of LGFVs are banks and households, which – in the case of a default – would be most affected, hence posing a risk to China’s financial system.
Mr Lan said on March 6 that more will be done to “transform financing platforms” but steps are already under way to cut down the number of LGFVs.
“The number of financing platforms has already been reduced,” he told reporters, without disclosing specific figures.
On Tuesday, during the delivery of the government’s annual work report at the opening of China’s top legislature meeting, Premier Li Qiang vowed to “make concerted efforts to defuse local government debt risks”.
A slew of measures will be rolled out to curb the problem, including developing “mechanisms that improve monitoring and oversight systems for the unified management of local government debts”, he added.
The central government issued recently a directive to two municipalities, three autonomous regions and seven provinces – including Heilongjiang in the north-east, western Gansu and south-western Yunnan – to downsize or stop state-funded projects early in 2024 due to their current high levels of debt.