Chinese cities struggle to pay bills after three years of Covid and property crash
Three years of tight pandemic controls in China and a real estate crash have drained residents government coffers, leaving authorities across the country saddled with mountains of debt. The problem has become so severe that some cities are now unable to provide basic services, and the risk of failure is increasing.
Analysts estimate China’s outstanding public debt topped 123 trillion yuan ($18 trillion) last year, including nearly $10 trillion in ‘hidden debt’ owed to funding platforms risks of local governments that are supported by cities or provinces.
As financial pressure has increased, regions governments are said to have cut wages, cut transport services and cut fuel subsidies in the midst of a harsh winter.
Thousands of people in the northern province of Hebei struggled to heat their homes in November and December due to a shortage of natural gas, according to several Chinese media. Cuts to government grants were partly to blame, according to public news site Jiemie.
In January, in the northernmost province of Heilongjiang, households in the city of Hegang were also left without heating after local businesses severely restricted the supply. The companies blamed the move on the lack of government subsidies.
The lack of heating in the middle of winter has sparked numerous complaints on social networks. The central government in Beijing has responded by ordering cities to provide adequate heating, but without specifying who will pay the bills.
Local governments have exhausted their budgets after spending huge sums of money enforcing frequent Covid lockdowns, mass testing and setting up quarantine centers ahead of December’s political U-turn, which marked the abrupt end to Xi Jinping’s zero-Covid policy.
“Beijing faces an economic minefield of its own,” said Craig Singleton, senior fellow at the Foundation for Defense of Democracies in Washington. “All told, the current Chinese debt crisis represents a perfect storm.”
It is not yet known how much the country has spent in total to fight the pandemic. But one province, Guangdong, has revealed it has spent $22 billion to stamp out Covid in the three years starting in 2020.
Turnover, meanwhile, contracted sharply over the same period. The continued lockdowns have seriously shaken household incomes, leading many to cut back on spending, which has resulted in lower tax revenues for local governments. Huge tax breaks to support businesses during the pandemic have also reduced government revenue.
The collapse of the housing market further complicates matters; house prices down for 16 consecutive 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.
Meanwhile, Hegang, the city in Heilongjiang province, made history in early 2022 by becoming the first to be forced to undergo a tax restructuring due to severe over-indebtedness, according to state media. Accordingly, it must cut spending on infrastructure projects, reduce government subsidies to industries, stop hiring new employees and sell assets, according to rules issued by the State Council.
Public sector jobs considered the safest in the country, have also been affected elsewhere. In June, several wealthy eastern provinces – including Guangdong, Zhejiang and Jiangsu – slashed wages by up to 30%, according to Chinese news site 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,” Singleton said.
Debt hampers the government’s ability to spur growth and stabilize jobs, as well as maintain or expand public services, he said.
“There is no doubt that the current Chinese debt crisis has the potential to exacerbate existing socio-economic tensions,” Singleton said, adding that new public protests like those in late 2022 could emerge, as citizens Chinese accept “the disappearance of jobs, the closure of businesses and reduced wages.”
China’s local government debt had already risen dramatically for a decade before the pandemic, largely due to a state-led investment boom following the 2008 global financial crisis. has deteriorated rapidly over the past three years.
Last year, local government debt jumped 15 percent to 35 trillion yuan ($5.2 trillion), according to data released by the Ministry of Finance on Sunday. Interest payments on local government bonds topped one trillion yuan ($148 billion) for the first time in history, according to state media.
Debt backed by local governments but not shown on their balance sheets could be much larger.
The “hidden debt” issued by the financial vehicles of local authorities, entities created by local authorities to circumvent the loan restriction and used to channel funding for infrastructure spending, could have totaled 65 trillion yuan ($9.6 trillion) by the middle of 2022, according to a recent estimate from analysts at Mars Macro, a Hunan-based economic research firm.
This is more than 20% higher than the 53 trillion yuan estimate made by Goldman Sachs in 2021.
This would be equivalent to more than half of China’s GDP. Overall, China’s public debt is now equivalent to 102% of its GDP, analysts have estimated.
This debt ratio is still lower than that of the United States, which is currently around 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.
There are already signs that local governments are struggling to repay their debts.
In early January, a struggling state-owned company in southwestern Guizhou province responsible for building infrastructure projects announced that its lenders had given it an additional 20 years to repay loans worth $2.3 billion. Loan renewals with such a long delay are extremely rare in China.
Analysts said the case signals that local governments are under severe financial pressure this year. Their tightening of debt could pose a serious threat to the Chinese financial system, in particular to small regional banks.
“Once defaults begin suggesting government guarantees have collapsed among LGFVs [local government financing vehicles]defects can quickly snowball,” 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. “Commercial banks in small towns and rural areas are particularly vulnerable due to their close relationships 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 difficult to track.
The central government in Beijing has signaled that it is not coming to the rescue.
“If it’s your baby, you should hold it yourself,” the finance ministry warned in a statement to local authorities earlier this month. “The central government will not bail out [you] outside.”
But Beijing may have to allow provinces and cities borrow more.
The Chinese economy is experiencing a serious slowdown. GDP grew just 3% last year, the second worst growth in 46 years.
The government had previously resorted to the old manual of encourage local governments to borrow more money to fund infrastructure projects to spur growth. In December, a boost in infrastructure helped boost economic activity, leading to signs of stabilization in growth.
In January, Bloomberg reported that Chinese authorities were considering a record quota for local government special bonds this year.
“So far, it looks like Xi really needs a quick economic recovery and has chosen to postpone the debt issue,” said Adam Liu, an assistant professor at the National University of China. Singapore.
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