China debt: State Council says local governments must ‘tighten their belts’ and cut debt to reduce financial risks

Announcement doubles down on Beijing’s commitment to move away from decades-old reliance on debt-driven growth

Analysts expect China’s leadership to focus on tackling growing implicit debt piles, particularly at local government levels

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China’s State Council is looking to tackle the growing implicit debt piles owned by local governments, while reducing local governments’ decades-old reliance on debt-driven growth. Photo: Xinhua

Published: 7:30pm, 16 Mar 2021Updated: 7:30pm, 16 Mar 2021

Beijing has ordered all levels of government across China to lower their debt levels, as leaders move to address the fiscal risks that arose last year when policymakers boosted spending and cut taxes to fight the economic fallout from the coronavirus pandemic.

In its work report presented to the National People’s Congress on March 5, Beijing said it would strive for “basic stability” in the macroeconomic leverage ratio of debt to gross domestic product (GDP). But at Monday’s meeting of the State Council, the government cabinet explicitly called for a reduction in the government’s debt level.

The announcement underscores Beijing’s commitment to its renewed deleveraging campaign to reduce debt and financial risks, which the work report cited as one of the government’s five major tasks for this year. It also further differentiates Chinese economic policy from that of the United States, with Beijing pushing to reduce economic stimulus while Washington ramps up economic support and takes on massive amounts of new debt.

The State Council’s announcement suggests it will focus on tackling the growing implicit debt piles owned by local governments, and on reducing local governments’ decades-old reliance on debt-driven growth, posing a new test to local financing vehicles and state-owned enterprises, analysts said.

“Governments at all levels must tighten their belts,” the State Council statement says. “We must solve the potential risks and consolidate the economic recovery.”

China’s overall leverage ratio jumped by 24.7 percentage points last year to 270.1 per cent of GDP because of growing indebtedness by businesses and households amid weak economic growth and a sharp rise in government spending on economic stimulus, according to the National Institution for Finance and Development (NIFD), a Beijing-based governmental think tank.

China’s overall government debt does not appear to be as big of a concern, as its ratio expanded 7.3 percentage points to 45.6 per cent of GDP, while the central government’s debt ratio stands at 20 per cent and that of local governments is 25.6 per cent.