China local governments forced to rob Peter to pay Paul to honour rising debt mountain
- China’s had 18.4 trillion yuan (US$2.74 trillion) worth of local government debts at end of 2018, equivalent to 20 per cent of nominal gross domestic product
- Researchers estimate that true government debt level in China may have reached 92 per cent of GDP in 2017 if implicit liabilities were considered
Local governments in China are being forced to rely on new loans to repay debt and fund ongoing construction projects with authorities struggling to honour their existing financing, according to Chinese researchers.
The murky local government debt mountain, incurred through local government financing vehicles (LGFVs) and agreements, is one of the key risks hanging over the world’s second largest economy and one the central government has been trying to contain by allowing local authorities to issue bonds.
After years of cat-and-mouse between Beijing and the local government officials, China’s Ministry of Finance officially recognised 18.4 trillion yuan (US$2.74 trillion) worth of local government debts as the end of 2018, equivalent to 20 per cent of the nominal gross domestic product (GDP). Even with the debt owed by the central government, the debt would only account for 37 per cent of China’s GDP, a number Beijing often cites to claim that the risk of government debt is under control.
However, analysts said the real local government debt could be much larger as the “explicit” part, mainly in the form of bonds approved by Beijing, is only part of the story, and that a significant majority of local government debt is “implicit” in the form of debt under LGFVs and state firms controlled by local authorities.
A state-led mode was once an important tool contributing to China’s economic take-off, but it is now the systematic reason for rising leverage and risk accumulation.
Zhang Xiaojing, a deputy director of the Institute of Economics at the Chinese Academy of Social Sciences, a government think tank, estimated that the true government debt level in China may have reached 92 per cent of GDP in 2017 if implicit liabilities were considered. The broad public sector debt, which covers governments, state firms and LGFVs, could worth 140 per cent of GDP, Zhang said.
