China’s illegal local debt pile grows as Beijing looks to infrastructure to buffer growth from US trade war
National Audit Office points to billions of yuan in new borrowings but this could be just the tip of the iceberg, analyst says
Despite direct orders from Beijing to cut leverage, China’s local governments continued to create illegal debt this year in part to offset the impact of the trade war with the United States, according to the National Audit Office (NAO).
In its second quarter review published on Tuesday, the NAO uncovered a further 8.9 billion yuan (US$1.3 billion) of implicit government debt created this year. The debt carries an implicit repayment guarantee from a local government entity even though such guarantees are illegal.
The continued growth in these borrowings highlights an ongoing challenge facing China and suggests the government might have to increase its intervention at the local level to stop the practice.
However, any attempt to clamp down on local government debt could also adversely affect financing for local infrastructure projects, a key part of the central government’s plan to stabilise the economy amid the trade war with the United States.
At the same time, local governments have received conflicting instructions from Beijing, with orders to both to cut back on implicit debt but also to find ways to fund the infrastructure projects needed to bolster growth.