Chinese cities are struggling to pay their bills as 'hidden debts' soar

[walterbibikow]

Hong Kong(CNN) Three years of strict pandemic controls in China and a real estate crash have drained local government coffers, leaving authorities across the country struggling with mountains of debt. The problem has gotten so extreme that some cities are now unable to provide basic services, and the risk of default is rising.

Analysts estimate China's outstanding government debts surpassed 123 trillion yuan ($18 trillion) last year, of which nearly $10 trillion is so-called "hidden debt" owed by risky local government financing platforms that are backed by cities or provinces.

As the financial pressure has mounted, regional governments have reportedly been slashing wages, cutting transportation services and reducing fuel subsidies in the middle of a harsh winter.

Thousands of people in the northern province of Hebei had trouble heating their homes in November and December because of a shortage of natural gas, according to multiple Chinese media reports. Cuts in government subsidies were partly to blame, according to state-owned news site Jiemian.

In January, in the northernmost province of Heilongjiang, households in the city of Hegang were also left without heat after local firms severely restricted supply. The companies blamed the move on a lack of government subsidies.

The lack of heating in the dead of winter has led to widespread complaints on social media. The central government in Beijing responded by ordering cities to provide adequate heating, but without specifying who will pay the bills.

Local governments have exhausted their budgets after spending enormous amounts of money on enforcing frequent Covid lockdowns, mass testing and setting up quarantine centers before December's policy U-turn, which signaled the abrupt end of Xi Jinping's zero-Covid policy.

"Beijing is facing an economic minefield of its own making," said Craig Singleton, senior fellow for the Foundation for Defense of Democracies in Washington. "All told, China's current debt crisis represents a perfect storm."

Massive bills​

It's not yet clear how much the country has spent in total on fighting the pandemic. But one province, Guangdong, revealed that it had spent $22 billion on eliminating Covid over the three years beginning 2020.

Revenue, meanwhile, contracted sharply over the same period. Rolling lockdowns seriously dented household incomes, leading many to reduce spending, which in turn resulted in less tax revenue for local governments. Huge tax breaks to support businesses through the pandemic also reduced government income.

Further complicating matters is the housing market slump; home prices have been falling for 16 straight months. Land sales, which typically account for more than 40% of local government revenue, have collapsed.

Last year, a number of cities suspended bus services due to budget constraints, including Leiyang in Hunan province and Yangjiang in Guangdong, according to operators' announcements.

Separately, Hegang, the city in Heilongjiang province, made history in early 2022 by becoming the first to be forced to undergo a fiscal restructuring due to grave debt distress, according to state media reports. As a result, it must cut spending on infrastructure projects, reduce government subsidies to industries, stop hiring new staff and sell assets, according to rules published by the State Council.

Public sector jobs, considered the most secure in the country, were also affected elsewhere. In June, several wealthy eastern provinces — including Guangdong, Zhejiang and Jiangsu -— slashed pay by as much as 30%, according to Chinese news website Caixin.

"China's runaway local debt poses a serious threat to the country's overall economic health and will weigh heavily on China's still-nascent recovery," said Singleton.

The debt inhibits the government's ability to spur growth and stabilize employment, as well as maintain or expand public services, he said.

"No doubt, China's current debt crisis has the potential to exacerbate existing socio-economic tensions," Singleton said, adding that renewed public protests like those in late 2022 could emerge, as Chinese citizens come to terms with "vanishing jobs, closed businesses and reduced wages."

'Hidden debt'
China's local government debt had already been rising dramatically for a decade before the pandemic, largely the result of a state-led investment boom in the wake of the 2008 global financial crisis. But the situation has deteriorated rapidly in the last three years.

Last year, local government debt jumped 15% to 35 trillion yuan ($5.2 trillion), according to data released by the Ministry of Finance on Sunday. Interest payments on local government bonds exceeded one trillion yuan ($148 billion) for the first time in history, according to state media.

Debt that is backed by local governments but which doesn't show up on their balance sheets could be much bigger.

The "hidden debt" issued by local government financial vehicles, entities created to circumvent borrowing restrictions and used to channel funding for infrastructure spending, might have totaled 65 trillion yuan ($9.6 trillion) by the middle of 2022, according to a recent estimate by analysts at Mars Macro, an economic research firm based in Hunan.

That's more than 20% higher than the estimate of 53 trillion yuan made by Goldman Sachs in 2021.

That would be equivalent to more than half of China's GDP. Overall, Chinese government debt is now equivalent to 102% of its GDP, the analysts estimated.

That debt ratio is still lower than America's, which is currently about 122%, based on its national debt and GDP in 2022, but China's has grown at a staggering rate, more than doubling from 47% in 2016.

Financial risks
There are already signs local governments are having trouble repaying their liabilities.

In early January, a troubled government-owned company in the southwestern province of Guizhou responsible for building infrastructure projects announced that its lenders had given it an extra 20 years to repay loans worth $2.3 billion. Loan rollovers with a such a long time frame are extremely rare in China.

Analysts said the case signals that local governments are under severe financial pressure this year. Their debt squeeze could pose a serious threat to China's financial system, particularly to small regional banks.

"Once defaults begin, suggesting that government guarantees have broken down among LGFVs [local government financing vehicles], defaults can snowball quickly," Allen Feng and Logan Wright, China analysts at Rhodium Group, wrote in a research report last week.

"As a result, there is a significant risk of financial contagion," they said. "Smaller city and rural commercial banks are particularly vulnerable because of their deep relationship with local governments."

Even the country's top officials have admitted that one of the biggest threats to financial stability in 2023 is hidden local government debt, which is opaque, huge and hard to track

Dilemma
The central government in Beijing has signaled it's not coming to the rescue.

"If it's your baby, you should hold it yourself," the Ministry of Finance warned in a statement earlier this month aimed at local authorities. "The central government won't bail [you] out."

But Beijing may have to allow provinces and cities to borrow more.

China's economy is in a severe downturn. GDP grew only 3% last year, the second worst growth in 46 years.

The government had previously resorted to the old playbook of encouraging local governments to borrow more money to fund infrastructure projects to boost growth. In December, an infrastructure push helped boost economic activity, leading to signs of growth stabilization.

In January, Bloomberg reported that Chinese authorities were considering a record quota for special local government bonds this year.

"So far, it seems that Xi badly needs a fast recovery of the economy, and has chosen to shelve the debt problem for later," said Adam Liu, an assistant professor at the National University of Singapore.

Chinese cities are struggling to pay their bills as 'hidden debts' soar

Three years of strict pandemic controls in China and a real estate crash have drained local government coffers, leaving authorities across the country struggling with mountains of debt. The problem has gotten so extreme that some cities are now unable to provide basic services, and the risk of...

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[Skull and Bones]

Ya, I don't care about them.

 

[walterbibikow]

China’s Overwhelming Debt Burden Points To Still Deeper Problems

Beijing has at last begun to acknowledge its deep financial problems. A few weeks ago, after dithering for more than a year, it took steps to reliquefy its troubled property sector. More recently, it announced a new financial stability law that according to Vice Chair of the People’s Bank of China (PBOC) Liu Guoqiang, aims to control risk. Such measures may offer temporary relief, but they cannot address China’s deeper economic troubles and their reflection in financial markets.

The size of China’s debt problem is truly staggering. At last measure, debt of all sorts – public and private and in all sectors of the economy — amounted to the equivalent of $51.9 trillion, almost three times the size of China’s economy as measured by the country’s gross domestic product. This is the highest level recorded in the 27 years since Beijing first began to track such statistics. Matters seem set only to get worse. According to the Beijing-backed National Institution for Finance and Development, local authorities are set to issue new debt next year of some 4 trillion yuan, the equivalent of $570 billion.

China’s debt overhang far exceeds the burdens facing the United States. As recently as 2020, total debt in the United States relative to GDP exceeded China’s. But as of mid-2022, China’s relative debt burden stood 40 percent higher than America’s. If this comparison does not highlight China’s precarious situation, it is worth considering that more developed countries, such as the United States, tend, because of their greater relative wealth, to have higher relative debt burdens and can support them more easily than less developed economies, such as China’s.

Local government seems to be the culprit in China’s overall debt morass. It is not that localities have followed profligate policies. It is that they are tools of the central planners in Beijing. When those planners launch a spending program, such as the recent infrastructure building plan, they impose on local government to issue the debt needed to finance the effort. This debt has grown 11 percent through the middle of 2022, the most recent period for which data are available, fast enough to more than overcome modest private borrowing declines fostered by the hazy economic outlook.

Behind these frightening trends lie two more fundamental problems confronting China’s economy and its financial markets. The first of these is China’s demographic imperative. Because Beijing for decades imposed a one-child rule on families, China now has a paucity of young workers to support a disproportionately large retired population, a matter that will only get worse in coming years. A summary of the Pew Research Center estimates that China’s population has already begun to decline and that soon the economy will have less than three people of working age for every retiree. Because these three workers cannot possibly produce the required surplus, Beijing will have to use debt to support its social security pension obligations.

Perhaps on a still more fundamental level (if one is conceivable) the debt also reflects an essential of communist economic management. Unlike a predominantly market-based system, where diverse actors pursue a vast variety of investments, China’s reliance on centralized direction dominated by state-owned enterprises tends to channel economic resources into a few, grand programs. When these are successful, the results are impressive, but when they miss underlying economic needs, the losses and the accompanying debt can grow to massive proportions. Recent property development failures are indicative. Private firms are involved, to be sure, but the size of the failures nonetheless reflects the huge emphasis central planners previously placed on residential construction, so large in fact that at its height the sector amounted to an outsized 30 percent of the economy. China may have changed direction since, but the debt remains, and the failed developments cannot support it. Nor is real estate the only mistake. Other such errors have contributed to the debt overhang that is now so evident in the figures.

Severe as the matter is, it would be a mistake to see immanent disaster in it. Rather the debt burden and the need to redirect economic resources to carry it will limit the economy’s ability to pursue other potentially promising investments. The debt burden will accordingly tend to slow China’s pace of economic growth, certainly relative to the rapid rates of the not-too-distant past. Because China’s demographics will not change soon and because President Xi Jinping is centralizing economic decision even more than in the past, it looks as though the debt problem will only get worse, with all its deleterious effects on the economy’s pace of growth.

China’s Overwhelming Debt Burden Points To Still Deeper Problems

Communist management and demographic imbalances are set to deepen China’s financial troubles.

www.forbes.com

 

[hembo]

Why Wion & @walterbibikow are obsessed about China's negative news? Forget China, let it go up or down... We don't care. Focus on taking India to the next level. Also get rid of this tagging business. Specially non-Indians.

While I'm at it, make a combined thread for all border infrastructure developments, rather then making different threads for different (sometimes the same) news about it. If required, request the mods to make the thread sticky.

 

[Erieye]

China is crashing you're so right my friend. it is about to default and go bankrupt.

China failing, India rising.

 

[GodToons]

Most of the Chinese debt is in local currency, it can be managed unlike Pakistan.

 

[beijingwalker]

Most Chinese government debt was owed to the Chinese state owned companies and institutions, in a sense, those debts are also the government assets, it's like your right pocket owes money to your left pocket.

 

[beijingwalker]

China boasts one third of the world total foreign reserves, and also the world biggest creditor, many countries owe China tons of money, including US, so it's funny for US to worry about debt in China, they should worry more about the debt they owe to China.

 

[zectech]

Don't worry if Chinese build roads and transportation. Then success. China makes money and has no debt.

Phase 1: Build roads
Phase 2: ???
Phase 3: Record profits to have no Chinese debt.

Pakistan has not figured out the secret of building the strongest economy in the globe.


Phase 1: Build roads
Phase 2: ???
Phase 3: Pakistan has the largest and most successful economy

This is the Chinese strategy.

 

[beijingwalker]

China sells everything to the world and makes tons of money every single hour, India registers record high trade deficit year on year, you should worry more about how to sustain yourself by just buying but not selling.