Hit hard by slowdown, wary China seeks curb in rising local governments’ debt

Feeling heat on its economic front, China has for the first time asked local governments to curb unchecked borrowings as rising debt levels have severely affected development projects in the country, while at the same time posing a grave threat to the national financial system.

Last week, as per South China Morning Post, China’s National People’s Congress, the supreme organ of state power was told by the country’s Finance Minister Lan Foan that the statutory government debt piled up to 70.77 trillion yuan, which included 30.03 trillion yuan worth of treasury bonds and 40.74 trillion yuan in local governments’ debt by the end of 2023.

China’s Finance Minister further told the National People’s Congress that the total debt stood at 56.1% of the national GDP, the Hong Kong-based English daily said.

Even as he projected it as a low debt-to-GDP ratio in comparison with developed nations, he presented only the half-truth on the current debt size of the country.

For example, China’s present debt situation does not include liabilities, “such as those hidden in financing vehicles, state-owned enterprises or public-private partnership projects,” South China Morning Post said.

However, the IMF has torn apart the façade created over the actual debt situation in China. It said that in 2023, corporate debt alone stood at 123% of GDP, while household debt stood at 61% of GDP. The Bretton Woods institution said the total debt, which included Local Government Financing Vehicles and other government funds, stood at 116 trillion yuan, about $16 trillion in 2023.

Quoting some economists, The Wall Street Journal said the size of local governments’ debt alone could be somewhere between $7 trillion and $11 trillion, while Goldman Sachs’ estimation is that local governments’ debt pile could be $13 trillion, which includes liabilities from off-balance sheet entities known as local government financing vehicles (LGFV).

As many as 20 local-level governments in China are facing a huge crisis due to rising levels of debt, severely impacting construction projects and other services in the country.

According to The Financial Times, in Yunnan province, as many as “1,153 government-funded infrastructure projects such as highways and theme parks have been suspended and new construction halted to limit expenditures.”

Yunnan is China’s most indebted province. In 2022 alone, Yunnan’s debt totaled 1.2 trillion yuan ($169.4 billion), which was around 500 billion yuan more than its revenue earned that year, South China Morning Post said. What worries economists the most is that some local governments in China resort to rack up more debt to pay off the old debt.

Tianjin, a heavily debt burdened municipality, lying 100 km away from Beijing, borrowed 14.7 billion yuan ($2.08 billion) between June 2018 and May 2023 to help repay its old debt. It has resulted in an increase of 7.4 billion yuan in the existing debt of Tianjin.

All this has impacted public trust and business confidence in China. As per CNBC, the CKGSB Business Conditions Index, a monthly survey of Chinese businesses, fell to 48.6 level in August 2024. In the recent past, foreign investors have pulled a record amount of money from the country.

Even the FDI has sharply declined. Inbound FDI in China declined 28.2% in the first five months of 2024 from the same period last year to 412.51 billion yuan ($56.8 billion), Bloomberg said in its recent report. In 2023, inbound foreign investment in China fell to $163 billion. “FDI growth declined from 4.5% in 2022 to negative 13.7% in 2023,” China’s Ministry of Commerce said.

American, European, and Japanese businesses’ confidence is already low in the country. According to AP, many European businesses are thinking that the “returns on their investments in China are not worth the risks,” due to the country’s economic woes and rising geopolitical tension.

Like their European counterparts, American businessmen too said they are experiencing low business confidence in China.

According to an annual report released on September 12, the Shanghai-based American Chamber of Commerce maintained that out of the 306 of its member companies surveyed, only 47% of respondents reported optimism about business outlook in China, while a record 25% cut their investment in the East Asian country in 2023.

Earlier, a Reuters monthly poll showed that business confidence among big Japanese companies sank to a seven-month low in China. Reuters Tankan which closely tracks quarterly business surveys, showed that business confidence among Japanese companies towards China was at plus 4 in September, down from August’s plus 10 and the lowest since February’s minus 1.

In view of such developments, Chinese authorities recently issued a new order calling for reforming the economy and curbing the rise of local governments’ debt, including hidden ones to make the country attractive again for investors. However, even when chips are down, Chinese provinces’ local governments appear to be less sincere towards debt-management policies.

A number of local governments are not “strict enough in implementing budgetary and debt-management policies,” the National People’s Congress was told last week by a senior Chinese authority, the Hong Kong-based English daily said. This is happening at the time when China is also witnessing a decline in its bond assets in the US. China’s holding of US government bond assets dropped to $776.5 billion in July from $780.2 billion in June, Bloomberg said.