Beneath the tip of China’s nightmare debt mountain
The State Council plans a major audit into local government debt just four years after a review failed to curb excessive spending
For a bean counter, it is a numerical nightmare. Sifting through dusty old ledgers and crunching the figures online rates alongside an insomniac counting sheep in the hope of a good night’s sleep.
But China’s cabinet, the State Council, appears determined to get to grips with local government debt, including the off-the-books “hidden” risks, which have been accumulating for the best part of nearly two decades.
By the end of April, the mountain had topped 16.61 trillion yuan (US$2.6 trillion), data from the Ministry of Finance showed.
Unfortunately, for the army of accountants in Beijing, that might be on the conservative side, according to Yin Zhongqing, the deputy director of the financial and economic affairs committee of the National People’s Congress.
While gauging the scale of China’s debt is frankly a mission impossible, Yin confirmed that it could be at least 20 trillion yuan. This would include local government bonds, debt amassed in the state-owned enterprise sector, and public and private investment schemes.
“Local government officials never worry about repaying debts, they only worry that no one is lending them money,” Yin said at last year’s NPC gathering. “Part of the reason was that all local governments are part of a centralized authority that will eventually be bailed out.”
Tighter regulations have been brought in over the past 12 months, but the addiction remains.
During the last major audit in 2014, the government uncovered 15.7 trillion yuan of outstanding local government debt, the state-owned China Daily reported. To ease the problems, bonds worth 10.9 trillion yuan were issued.
Four years later, the State Council has launched another major review as Beijing continues its crackdown on extravagant borrowing.
“The sword of Damocles is hanging over Chinese local governments,” a report by Stratfor, a geopolitical intelligence portal based in the United States, stated last month. “After the 2008 financial crisis, Beijing began embracing economic stimulation as it scrambled to prop up growth and employment.
“In doing this, the central authorities demanded that local governments bear the brunt of the fiscal and financial responsibilities for road, railway and other infrastructure projects [and] rewarded them with lucrative credit and looser oversight amid a skyrocketing real estate market,” it continued.
“A decade later, local debt – and the tangled web behind some of the loans – has become the greatest pain to the economy. [Yet] the exact size of the debt taken on by local governments and related entities [remains] a mystery.”
So far, the Ministry of Finance and the National Audit Office have failed to disclose official estimates of the country’s “hidden” risks.
But the NAO did name six cities for failing to account for 15.4 billion yuan by the end of 2017 with Shaoyang in Hunan province racking up 7.2 billion yuan in excess borrowing. Again, this is probably just the tip of the debt mountain.
Major agencies Moody’s and Standard & Poor’s have constantly cited the challenges facing Beijing after downgrading China’s sovereign credit rating by one notch in 2017.
Indeed, local government debt jumped 7.5% last year to 16.47 trillion yuan, the Ministry of Finance reported, which was almost double the 2016 increase.
“The central government has been aware of the potential local government debt risk for a long time,” Qiao Baoyun, the head of the Academy of Public Finance and Policy under the Central University of Finance and Economics in Beijing, said. “It is necessary to check how large the off-budget debt is, [and] then we can know how to manage the risk.”
Sill, this could not have come at a more difficult period with China’s economy showing signs of cooling.
President Xi Jinping’s administration is in the delicate process of realigning from low-cost manufacturing to technology-fueled growth through the “Made in China 2025” policy. Expanding the service sector is another crucial component.
War on debt
At the same time, the war on debt has pushed up borrowing costs, triggering a rising number of defaults, while lurking in the background is the trade brawl with the US. Despite this week’s planned talks in Washington, it continues to rumble on.
“The Chinese economy will get worse before getting better,” Ting Lu, the chief China economist at Nomura investment bank, said in a research note.
“Beijing will step up credit easing and fiscal measures to deliver a recovery and prevent financial troubles such as a rise of bond defaults,” Lu added.
Last month, the powerful Politburo announced plans to relax the vise-like grip on borrowing to stimulate the economy with increased spending on infrastructure projects expected in the second half of the year.
But this could exacerbate already excessive debt levels, the International Monetary Fund warned after suggesting that Beijing should resist another stimulus binge.
“Directors [have] stressed the importance of staying the course on reining in credit growth,” the IMF stated.
At this rate, the bean counters will need bigger abacuses.