China’s overall government debt ratio remains low compared with other major economies, and the country’s local government bond debt risk is controllable, as a strong economic rebound provides support for local government financing vehicles’ (LGFVs) debt repayment capability, analysts said.
The comment came after a new round of Western media hype over China’s alleged local government debt problem while choosing to neglect facts as well as the Chinese central government and provinces’ efforts in dissolving local government debt. For example, the New York Times plastered the sensational headline “China’s cities are buried in debt,” and the Economist claims that “China’s cities are on the verge of a debt crisis.”
Chinese local government debt includes outstanding local government bonds and bank loans, and bonds issued by LGFVs that is typically an infrastructure project investment. The latter is generally called hidden debt.
By February, the amount of outstanding local government bonds totaled 36.22 trillion yuan ($5.25 trillion), according to data released by China’s Ministry of Finance.
“There is no official figure on the total amount of LGFVs’ debt. It’s estimated to be around 60 trillion yuan, of which about 40 trillion yuan belongs to local government debt,” Liu Guohong, director of the Department of Finance and Modern Industries at the China Development Institute in Shenzhen, Guangdong Province, told the Global Times on Sunday.
Local government pressure mainly comes from commercial debt raised through LGFVs, as they may face debt repayment pressure in the short term and high interest rates but their investment in infrastructure creates slower-paced lower direct yields, he said.
By now, there have been no public reports of an LGFV default but some have sought loan extensions. In December, Zunyi Road and Bridge Construction (Group) Ltd, an LGFV in Southwest China’s Guizhou Province, announced it plans to extend the repayment of 15.6 billion yuan of bank loans within 20 years, triggering worries about the risks of China’s hidden local government debt.
The case of Zunyi Road and Bridge Construction Ltd is isolated and cannot represent the country’s overall local government debt situation, analysts said, stressing that China’s overall risk of local government debt is controllable.
Sound prevention mechanism
China’s local government debt has two-level risk prevention mechanisms, with local governments filing applications for approval and the central government controlling the total quota, which jointly work to ensure the safety of China’s local government debt, Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, told the Global Times.
“In addition, when talking about local government debt risks, we should not only assess a province’s tax revenue, land sales, and GDP growth but also their assets. Most Chinese provinces have sufficient assets to cover their debts,” Liu Guohong said.
China’s government debt to GDP ratio was about 50 percent in 2022, a relatively low level by global standards, Minister of Finance Liu Kun said at a news conference in March.
The Chinese central government has also stepped up the regulation of hidden local government debt to prevent and resolve financial risks since 2017. Presently, South China’s Guangdong Province is the first to eliminate hidden local government debt, while Beijing and Shanghai have launched trials to realize “zero hidden government debt,” according to media reports.
On April 20, China Cinda Asset Management Co reached an agreement with local financial regulators in Guizhou Province, a less-developed province that has had trouble with local government debt. The company will organize a group of 50 financial experts to provide high-quality financial services to Guizhou in terms of preventing and containing financial risks and other services, according to the company’s press release.
Guizhou’s neighboring province of Yunnan recently announced that hidden local government debt across the province and non-performing banking loans continue to drop, as the province steps up efforts to ensure financial security, read a statement on the government’s website on April 16.
Capable of containing risks
China is capable of pre-empting systemic fiscal risks, said Liu Kun. “We have already urged relevant local authorities to take primary responsibility and effectively defuse government debt risks to ensure that no systemic risks arise,” he said.
The Ministry of Finance said in a document on January 6 that it will introduce a mechanism to handle debt defaults in a market-oriented and law-based manner to properly defuse any potential financial risks at the local government level. Any debt risks would be fairly shared among debtors and creditors, and the principle of “no bailout from the central government” will be strictly adhered to.
This round of rapid growth in local government debt is mainly caused by non-synchronization between urbanization and industrialization, especially in the central and western regions which have boosted urbanization with shed-led reform, resulting in debt increasing faster than the growth of industrial and tax revenue, Deng Haiqing, chief economist of AVIC Fund Management Co, told the Global Times on Sunday.
Thus, the central and western regions should step up attracting investment to promote the growth of their industrial sector, and should curb rapid growth of debt by lowering their economic growth goals and reducing investment in urbanization, Deng said.
He said that market-oriented mechanisms should be adopted to resolve the local government debt problem, for example, through direct financing in the stock market. “The regulators can launch pilot programs by allowing some LGFVs to go bankrupt,” he said.
“We should solve local government debt from the perspective of development,” Liu Guohong said, noting that suitable local government bonds should be expected to support economic growth and accordingly increased taxation and other revenue streams will help contain potential financial crises. In order to reduce the burden on provinces, the central government should fund large-scale cross-regional infrastructure projects with government bonds, which will avoid the mis-match problem due to low interest rates and long maturity periods, he added.