Does one county’s debt woes highlight the potential pitfalls buried under the surface of China’s economic prosperity?
- Dushan county in Guizhou province has accumulated 40 billion yuan (US$5.7 billion) of debt, or around 40 times of its annual fiscal revenues
- The local government of Dushan is in technical bankruptcy, but is unlikely to follow the US city of Detroit as it enjoys an implied unlimited credit guarantee
The county of Dushan in Guizhou province, a poor and remote corner of China, hit the headlines earlier this month after the local authorities’ reckless borrowing to finance a series of white elephant projects was vividly recorded in a documentary that went viral.
The government of Dushan, which oversees a mountainous area with a total population of 360,000, has accumulated 40 billion yuan (US$5.7 billion) of debt, or around 40 times its annual fiscal revenues. By any standard, the local government of Dushan is in technical bankruptcy.
China’s official media blamed Pan Zhili, who served as the local Communist Party boss from 2010 until 2019 when he was sacked and put under investigation for corruption, as the reason for the financial losses and fiscal mess.
But the fundamental problem goes much deeper than an over ambitious cadre who had little respect for the need for a return on the county’s investments.
Dushan is a tiny spot on China’s economic landscape and the troubles there are unlikely to spread. Under China’s governmental structure, there is no legal or institutional basis for a local government to file bankruptcy, as the American city of Detroit did in 2013.
Dushan enjoys an implied unlimited credit guarantee from the Guizhou provincial government, which in turn, enjoys the same from the central government in Beijing.
This risk-free arrangement leads to local governments scrambling to borrow more money to finance operations and pet projects. He Keng, an outspoken member at China’s National People’s Congress, put the problem in a very straightforward way: no local government in China has the intention to repay its debt.
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But China’s financial exuberance in the last decade, including an explosive growth in shadow banking, the rise of off-budget local government financing vehicles and ultra loose policies for bank credit and overall liquidity, have made the situation completely different.
Fiscal discipline is ignored or easily skirted, and the line between financial and fiscal affairs is blurred on a nationwide basis, although on the national level, the People’s Bank of China continues to resist efforts by some in Beijing to put it at the direct service of the Ministry of Finance.
Local governments, from a small place like Dushan to a big city like Tianjin, are powerful players in the economy, sucking in fiscal and financial capital and spending on projects that can quickly translate into growth figures and a good impression, especially to those who can influence local officials’ career prospects.
It is an open secret that many small regional banks are just another money bag for local authorities. In the case of Dushan, it is not an accident that the president of Dushan Rural Commercial Bank was fined 70,000 yuan (US$10,000) by the local banking regulator for “irregularities in granting loans”.
To make it worse, the mix of financial and fiscal risks at the local government level is often opaque and hard to measure. Local government borrowings are often parked in projects or special financial entities – Dushan alone has set up dozens of such vehicles to borrow money – while non-performing assets can be easily covered by rollovers.
One sliver of hope that China is not on the edge of financial collapse yet is that China’s big, systemically important state-owned banks are relatively prudent in financing local government ambitions.
But China has nearly 3,000 county-level governments like Dushan and more than 300 municipal governments across the country, and the great majority of them operate with the intention to exhaust financial and fiscal resources for quick development.
Many of these, to some extent, are the thousands of potential pitfalls buried under the surface of China’s economic prosperity.