All new roads in China lead to a mountain range of debt
Beijing has already targeted state-owned enterprises, corporate conglomerates and ‘zombie companies,’ and is now going after local government borrowing
Imagine a plague of locusts stripping a ripe cornfield. Now, envisage debt ravishing an economy, leaving behind an empty, soulless husk. In China, President Xi Jinping’s economic team is well aware of the metaphor.
Already a spot of financial ‘crop spraying’ has been ordered.
Indeed, grappling with debt and corporate corruption will be the over-riding priorities for Xi during his second-term in office, despite the threat of a trade war with the United States looming large in the background.
So far, state-owned enterprises, ‘zombie companies’ and corporate conglomerates, as well as excessive consumer borrowing, have been targeted. Next in line are local governments and what has been described by the International Monetary Fund as their “off-budget” spending.
“China’s official government accounts do not capture a large amount of fiscal spending delivered through off-budget units,” an IMF working paper, written by Rui Mano and Phil Stokoe, stated at the end of last year. “Although progress has been made to legally separate off-budget units from the government, such units appear to not have been de facto separated from the government.”
In short, it is nearly impossible to gauge the depth of the problem.
Official data released by the Ministry of Finance in December showed that local government debt amounted to 16.6 trillion yuan ($2.5 trillion) by the end of November compared to 15.32 trillion yuan in 2016.
Fast forward to March, and it was 16.61 trillion yuan with up to 88% held in the form of bonds. For the whole year, Beijing has brought in a debt ceiling of 21 trillion yuan, according to the annual budget report.
Still, concerns are growing that the figure could far exceed that amount when taking in loans from other forms of financing, and funding from public and private partnerships, or PPP.
“The back door remains open,” the IMF working paper highlighted.
In an effort to slam the “door” shut, the central government has moved against the PPP sector by scrapping an estimated 2,400 projects worth around 2.3 trillion yuan, according to Bridata, a big data consultancy based in Beijing.
Back in November, the Ministry of Finance had warned it would start to clamp down on rising borrowing and squeeze ballooning debt by the end of March 2018. Bridate’s research, which was reported in the China Banking News two weeks ago, appears to back up Beijing’s tough line.
Yet challenges still exist in untangling a mountain of red tape.
“We face very many legal problems here,” said Zhao Quanhou, the chair of the financial research center at the China Academy of Fiscal Sciences. “For example, if everyone sustains losses during the initial period, how are the costs divided?
“For this, we need to look at the original PPP contract, and who bears policy risk … which is usually borne by the government, in order to make it easier for private capital to withdraw,” Zhao added.
Gauging the exact value of these projects would take clairvoyant powers. But by the middle of last year, China’s 4,220 PPP projects came in at 17.8 trillion yuan, or $2.86 trillion, statistics from the Ministry of Finance’s database revealed.
Scrambling through this maze of loans, bonds and complex financing will keep Xi’s economic brains trust, under Vice-Premier Liu He, working long into the night.
A member of the Politburo and a confidant of the president, Liu has constantly stressed that “risk prevention” must become part of the big picture.
“[We have to] strengthen the overall coordinating role of the State Council’s Financial Stability and Development Commission, [and] effectively control [the] rhythm and vigour [of a] stable and healthy development of finance,” he told financial regulators in March.
His advice came just weeks before news started to leak out that government-funded investment projects across Xinjiang, a massive autonomous territory in northwest China, had ground to a halt in a move to curb unrestrained borrowing.
In an unprecedented move, the Xinjiang Development and Reform Commission confirmed that local authorities must “comb through” every single government-funded project, which was started after January 2017.
“We would rather have a slower economic growth rate than accumulate debt and we must … ensure there is no increase in government debt,” a statement from the Xinjiang economic planning commission said.
Again, while the numbers are vague, at least 100 major infrastructure projects have been put on ice, Dayue Consulting, a Chinese company which tracks PPP developments and is approved by the State Planning and Development Commission, disclosed in a report.
Last year, authorities in Hohhot and Baotou, situated in Inner Mongolia, an autonomous region of northern China, axed approved projects worth billions of dollars due to financing issues, the Chinese financial magazine Caixin reported, citing unnamed sources.
“Our understanding is that the situation differs significantly between provinces [and regions],” Qi Zhengtao, an analyst with investment bank China International Capital Corporation, told the 21st Century Business Herald, a daily newspaper based in Guangdong.
“In provinces with the largest number of rescinded projects, the percentage canceled is as high as 30% [while] the overall average is around 15%,” Qi added.
Maybe, Beijing is finally launching an all-out campaign against mushrooming local government debt and bringing the curtain down on the day of the locust? Now, that is food for thought.