China’s Local Government Debt Crisis: A Bubble ready to burst?
Analysts predict that China’s local governments, which are already heavily indebted, will face even more financial stress this year. The reasons cited include a lack of revenue from land sales, high deficits, and rising liabilities. These factors have sparked concerns about a rising risk of default.
Despite the economic challenges, the central government has said that debt control will be a priority in 2023. The Beijing government announced last week that it had eliminated all “hidden debt” through a pilot program established by the central government to address off-budget borrowing.
However, the size and details of the city’s hidden debt were not disclosed. Local governments have often borrowed through off-budget channels, such as local government financing vehicles (LGFVs), which often lack transparency.
Regions in China Experience High Pressure to Repay Hidden Debt
China’s hidden debt is a significant concern, with certain regions being worse off than others. According to GF Securities, Tianjin, Chongqing, Jiangsu, Yunnan, and Guizhou have the highest debt ratios based on their outstanding debt balance to financial resources in 2021. The brokerage also predicts that Tianjin, Chongqing, Jiangxi, Sichuan, Hunan, Yunnan, and Guangxi will have the most pressure to meet interest payments this year.
In particular, Sichuan, Jiangxi, and Guangxi will experience an increase in debt repayment pressure in 2023 due to a decline in financial resources in 2022 and a sharp rise in interest payments for local government bonds and LGFV debts.
Chinese Government Implements Measures to Address Local Government Debt
In recent years, the Chinese government has implemented several measures, such as debt swaps and pilot programs for fiscal and loan restructuring, to address the issue of local government debt. In 2018, the city of Hegang became the first to undergo fiscal reorganization.
Additionally, Zunyi Road and Bridge Construction Group, a company responsible for building infrastructure in Guizhou province, announced a 20-year rollover of loans worth 15.6 billion yuan in December. The government has also increased supervision of debt control and has taken action against local governments and officials for “hidden debt risks.”
Furthermore, numerous officials in charge of Local Government Financing Vehicles (LGFVs) have been investigated by the Central Commission for Discipline Inspection.
Local Government Financial Struggles Raise Concerns of Possible Bond Defaults
Despite official assurances that local governments will not default on their bonds, financial struggles continue to plague local authorities. One notable example is the bankruptcy filing of Chongqing Energy Investment Group, a wholly owned subsidiary of the megacity of Chongqing, in April of last year.
Recent delays in bond payments by local government financing vehicles (LGFVs) have led to increased concerns about the potential for default. Furthermore, data from GF Securities indicates that overdue payments to suppliers by LGFVs in the form of commercial paper debt have been on the rise, signaling a potential cash flow crisis.