As the signs mount that the nation's economy is slowing, two announcements yesterday show how Beijing is getting increasingly nervous about the debts piled up by different arms of government.
First, the Finance Ministry said it would allow the provincial governments of Guangdong and Zhejiang, as well as the municipal authorities of Shenzhen and Shanghai, to issue their own bonds.
Letting local governments issue bonds has become a matter of urgency lately. Over the last three years the deficits incurred by mainland local governments have soared as they increased spending in response to Beijing's orders. Last year, combined local government deficits hit 3.3 trillion yuan (HK$4 trillion) (see the first chart above).
That was partly offset by fiscal transfers from Beijing, but even so the local governments were still over a trillion yuan in the red last year. As a result, local government debts have ballooned, reaching 10.7 trillion, or more than 25 per cent of gross domestic product, at the end of last year, according to the National Audit Office.
Around 8.5 trillion of that has been borrowed from the state banks, much of it in the form of short-term loans taken out to fund long-term infrastructure projects. With few of these projects likely to generate any revenues in the near future, analysts have grown more and more doubtful about the ability of local governments to service these loans.
If the economy now slows, that ability will be further eroded. Last year, local governments relied on a combination of land sales and property taxes to generate 56 per cent of their revenue. If the economy softens and property prices fall, much of that income will evaporate, exacerbating the size of local government deficits and possibly triggering widespread defaults by cash-starved local government projects.
By letting local governments issue bonds, Beijing is effectively allowing them to extend the maturity of their debts from short-term loans to longer-term bonds. Hopefully that will buy sufficient time for local infrastructure projects to begin generating enough cash to repay the debts incurred in their construction.
