China’s finance minister sees ‘relatively large’ room to increase govt debt

PUBLISHED : Tuesday, 07 March, 2017, 12:54pm
UPDATED : Tuesday, 07 March, 2017, 11:31pm

China’s government has “relatively large room” to incur debt, China’s finance minister Xiao Jie said on Tuesday, sending a message that Beijing is ready to increase government borrowing to bolster growth if needed.

Xiao, a former taxation chief who was promoted to his current post late last year, said at his first press conference that he was able to “put the risk of local debt into a cage” by opening a “front door” for local government to borrow, namely issuing bonds within a quota approved by Beijing, while closing “back doors” by banning illicit or illegal local government borrowings.

Xiao took sole charge at the press conference, taking all 11 questions himself, while assistant finance minister Dai Bohua sat on the stage without making any public comments throughout the session.

The policies listed by Xiao on local government debt were first initiated by his outspoken predecessor, Lou Jiwei, who worked hard to defuse the bomb of local government debt.

China moves to defuse local government debt bomb

Xiao’s comments came as the immediate risk of defaults in local government debt, once regarded as a potential source of a financial crisis in the country, have been reined in after Beijing has so far swapped over 8 trillion yuan (US$1.1 trillion) of local government debt with low-interest, long-term bonds.

Xiao said Chinese central and local government debt totalled 27.3 trillion yuan by the end of 2016, or 36.7 per cent of gross domestic product, and China is expected to maintain a similar rate throughout this year.

“China’s government debt risk is controllable,” Xiao said. “Compared to international peers, the Chinese government still has a relatively large room to borrow.”

While China’s fiscal situation is in better shape at face value, the numbers released from Beijing can only paint part of the picture, analysts said.

Chinese local governments have accumulated huge “hidden” debts via government-backed vehicles, trust investment programmes and implicit guarantees, plus the state also has big liabilities in state-owned enterprises and the country’s underfunded social welfare system.

The lack of transparency and consistency in China’s fiscal data makes it hard to produce an independent gauge of China’s fiscal health. For example, the annual budget report delivered to the National People’s Congress this week gave no exact figure for defence spending.

‘No bailouts’ in China’s plan to tackle local government debt pile

Premier Li Keqiang said in his government work report on Sunday that China plans to keep the fiscal deficit at three per cent of GDP this year. As China’s economy is growing, the government will have room to increase the fiscal deficit modestly under the same debt-to-GDP ratio.

China’s government debt is low, but the country’s corporate sector is accumulating debt at an alarming rate. The International Monetary Fund said last June China’s corporate debt level, which was about 150 per cent of GDP then, was “a serious, and growing, problem”.

China’s local government debt is a by-product of the country’s state-led development model, in which local governments try aggressively to secure funds to start new projects and to accelerate local economic growth.

Chinese debt growing faster than the economy

As China’s economic growth slows and the Chinese central bank became less aggressive in easing, debt repayment pressures are likely to rise significantly in China.

However, Xiao said there was little need to worry about China’s government debt.

“The cake of the Chinese economy will become bigger and bigger, so will China’s fiscal revenues,” said Xiao. “That will offer a fundamental support for China to repay debts.”