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Local governments sold 4.36 trillion yuan (US$630 billion) of bonds last year, up about 6 per cent from 4.12 trillion yuan from 2018, according to the Ministry of Finance released on Wednesday. Photo: Xinhua

China’s most indebted provinces face further woes in 2020 as pressure to help slowing economy grows

  • Qinghai, Guizhou and Hainan top the list of China’s most indebted provinces, in terms of debt-to-gross domestic product ratio, with debts of 1.3 trillion yuan in 2018
  • As of the end of 2019, local governments in China had debts totaling 21.31 trillion yuan (US$3 trillion)

Under pressure to help boost the economy by spending on infrastructure despite increasingly having less money at their disposal, some of China’s most indebted provinces are set to find themselves in worse positions in 2020 as debts only continue to rise.

Local governments sold 4.36 trillion yuan (US$630 billion) of bonds last year, up about 6 per cent from 4.12 trillion yuan from 2018, the Ministry of Finance said on Wednesday, adding to the total outstanding local government debts of 21.31 trillion yuan (US$3 trillion) at the end of 2019.

Local governments paid 656.7 billion yuan (US$95 billion) in interest for 2019, while seeing their tax revenues slow to growth of just 3 per cent at 9.3 trillion billion yuan due to a nationwide tax cut aimed at boosting the economy.

Weak prospects within the property market mean there is also little appetite for real estate development, which can hurt local government income, of which 70 per cent comes from land sales, according to Rory Green, China economist at TS Lombard.

We expect local government revenue to come under increased pressure this year. The [Communist] Party wants provincial officials to do more but with less money.
Rory Green
“We expect local government revenue to come under increased pressure this year,” said Green. “Beijing is asking them to invest in infrastructure, increase welfare provisions, and cut taxes and fees to stimulate the economy. The [Communist] Party wants provincial officials to do more but with less money.”

Local governments may also face liquidity problems from banks and growing debt in state companies that they have stakes in, Green added.

“Should banks get into difficulty the resulting bailouts will be a further drain on local government finances,” Green said.

Local governments may turn to so called special purpose bonds to help boost spending on infrastructure projects, with Green estimating that 600 billion yuan (US$87 billion) will be issued in January, a 300 per cent increase year-on-year.
More than two thirds of China’s provinces have already lowered their 2020 growth targets as Beijing attempts to hold off a sharp slowdown in the economy.

Not all of China’s local governments have released a breakdown of their debts for 2019. Haikou, the capital of the island province of Hainan, said last week that at the end of 2019, the city's debt balance was 69 billion yuan (US$10 billion), of which, general debt was 42.6 billion yuan (US$6.1 billion) and special purpose debt was 26.4 billion yuan (US$3.8 billion).

Using figures for 2018 as a comparison, we look at three provinces with the highest debt-to-gross domestic product (GDP) ratio, which compares the amount of debt in each region to the size of the economy.

1. Qinghai (Debt-to-GDP ratio = 61.5 per cent)

The sparsely-populated province in northwestern China has the highest debt-to-GDP ratio among the 31 provinces. Total outstanding debt stood at 176.3 billion yuan (US$25.4 billion) in 2018, the third-lowest in China, but its debt-to-GDP ratio of 61.5 per cent was the country's highest, according to estimates by Moody’s.

In 2018, Qinghai's GDP of 286.5 billion yuan was the second-lowest among Chinese provinces, and similar to Uzbekistan, according to Moody’s.

In 2018, Qinghai's GDP of 286.5 billion yuan was the second-lowest among Chinese provinces, and similar to Uzbekistan, according to Moody’s. Photo: AFP

Qinghai also has a high concentration of state-owned firms, a total of 619, despite its relatively small population. One of which is the debt ridden Qinghai Salt Lake Industry, the country's largest producer of potash.

Qinghai Salt Lake filed for bankruptcy with the Qinghai province court in September and said in January that it was set to post a net loss of between 43.2 billion yuan (US$6.2 billion) and 47.2 billion yuan in 2019, or 15 per cent of Qinghai’s total GDP.

2. Guizhou (Debt-to-GDP ratio = 59.7 per cent)

One of China's most impoverished provinces in the southwest region reported a total outstanding debt of 883.4 billion yuan (US127 billion) in 2018 following years of construction boom.

Guizhou’s GDP has been growing faster the national rate over the last few years, but so has it debt levels, with a debt-to-GDP ratio of 59.7 per cent.

The wooden building of the Shui ethnic group in Yingshan Town of Dushan County is of

According to a publication owned by the Central Commission for Discipline Inspection, Dushan county in Guizhou had an outstanding debt of over 40 billion yuan (US$5.7 billion) in 2018, compared to its revenue of just 1 billion (US$144 million). The county has embarked on a construction spree since 2016 with a number of white elephant projects including a 99.9 metre (329 feet) high wooden building that it had hoped would earn recognition as a Guinness World Record.

In 2017, the Ministry of Finance criticised a number of counties in Guizhou for violating rules regarding raising public funds, while in 2018, the National Audit Office warned of the risks of hidden debt in the province.

3 Hainan (Debt-to-GDP ratio = 40.2 per cent)

In 2018, the so called Hawaii of China had a GDP of 483.2 billion yuan (US$70 billion), which was the fourth lowest out of all provinces, as well as total outstanding debt of 194.2 billion yuan (US$28 billion) and a debt-to-GDP ration of 40.2 per cent.

While it has long been popular with holiday makers because of its tropical climate and beaches, the economically troubled southern island province has relied on a real estate boom as a main source of growth. But in 2018, its fixed asset investment fell 12.8 per cent as a result of falling home sales and policies aimed at reining in house prices.

In 2018, Hainan had a GDP of 483.2 billion yuan (US$70 billion), which was the fourth lowest out of all provinces. Photo: Xinhua

The situation in the capital city of Haikou was so severe that the government set out a two-year plan in 2018 to reduce its debt via land sales and reduced spending, with the goal of bringing the situation under control within five years.

Hainan is supposed to be transforming itself into a “high standard and high-quality free-trade zone” promoting foreign trade and investment and acting as a “pilot zone for the reform and innovation of China’s tourism industry”.

However, Mao Chaofeng, deputy governor of Hainan province, said last year that it was still struggling to meet the ambitious targets set out in the plan.

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