China hidden local government debt rises to over half of GDP at US$8.2 trillion, Goldman Sachs report says
- The total debt of local government financing vehicles (LGFVs) rose to around 53 trillion yuan (US$8.2 trillion) at the end of last year from 16 trillion yuan in 2013
- The report by economists at Goldman Sachs shows the debt is equal to around 52 per cent of gross domestic product
China’s hidden local government debt has swollen to more than half the size of the economy, according to economists at Goldman Sachs, who said the government will need to be flexible in dealing with this as revenue is already under pressure due to a slowdown in land sales.
That is equal to around 52 per cent of gross domestic product and is larger than amount of official outstanding government debt.
The LGFVs are a tool for governments to borrow money without it appearing on their balance sheets, but it is seen as the same as a government liability by financial markets.
There were some signs earlier this year that government was making inroads in cutting this debt as the economy’s rebound gave room to focus on tackling financial risks.
“More official local government bond issuance and increased flexibility on local government financing are probably needed to support overall economic growth [as land sales are slowing]”, economists led by Maggie Wei wrote in the report.
Land sales are a major source of revenue for local governments and sales have slowed down as the crisis at property developer China Evergrande Group worsens.
To make up the funding gap left by shrinking land sales revenue, Goldman recommended the government increase the bond quota for 2022 by more than 500 billion yuan (US$77 billion) from this year’s level of 3.65 trillion yuan (565 billion).
The liabilities of local financing vehicles are mostly concentrated in construction, transport and industrial conglomerates sectors, with these three sub-industries borrowing close to 40 per cent of the total LGFV debt.
Jiangsu tops all the provinces in the size of the borrowing, with about 8 trillion yuan in 2020, while Tianjin, Beijing, Sichuan, Guizhou and Gansu are the most leveraged provinces as a share of local economic output.
Around 60 per cent of the bonds issued by local platforms are used to repay maturing debt in 2020-21, rather than new investment.
One estimate by S&P Global Ratings in 2019 put the size at 20 trillion yuan, while another that same year from Rhodium Group put it at 41.2 trillion to 51.7 trillion yuan. According to a government-linked think tank, there was 14.8 trillion yuan of hidden debt in 2020.
Goldman’s calculation is based on an analysis of more than 2,000 LGFVs’ statements of their interest-bearing debt, including bonds and bank loans.