China to prevent increase in ‘generally controllable’ hidden debt for cash-strapped local governments

China will stop local governments accumulating further debt as it deals with 33.35 trillion yuan (US$5 trillion) of total outstanding government debt, Finance Minister Liu Kun said on Thursday.

Liu, speaking during the National People's Congress, confirmed the level of total outstanding government debt for 2018 was within the budgeted limit of 36.69 trillion yuan.

Liu said the risk from the current level of local government debt is “very low” and “generally controllable”, noting that China’s government debt-to-gross domestic product (GDP) ratio was 37 per cent, “much lower” than the European Union’s limit of 60 per cent.

As part of its effort to stabilise the slowing economy, Beijing has eased off its deleveraging campaign to reduce debt and risky lending. It has not abandoned its efforts to control the increase in debt and avoid the massive rise in lending that was part of the huge economic stimulus package after the global financial crisis 10 years ago.

However, local government tax revenues are falling due to the slowdown in the economy, and income from land sales is also slowing due to growing weakness in the property markets. This is forcing cash-strapped local governments to continue to seek ways around central government debt limits to gain access to new sources of credit, adding to their hidden debts.

Liu said that his department would not “shy away from the [subject of] hidden debts” held by local governments.