China’s hidden debt: ‘corruption problem’ at local levels threatens political, economic stability

Debt issued by local government financing vehicles (LGFVs) is kept off the balance sheets and thus more susceptible to corruption than relatively transparent government bonds

But analysts say LGFVs are poised to play bigger role next year in filling local government funding gaps, despite risks to national economy

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Local government financing vehicles sell bonds that help provincial authorities raise money, including for infrastructure projects. Photo: AFP

Published: 6:00am, 22 Dec 2021Updated: 11:39am, 22 Dec 2021

The line between China’s anti-corruption and deleveraging campaigns is becoming increasingly blurred as Beijing looks to tackle both political and economic problems that are interwoven at various levels of local government.

Since the beginning of the year, various provinces across the country have declared their commitment to “dig deep into the corruption problem hidden in the risks of local government debt”.

In a work report published earlier this month by the Commission for Discipline Inspection and Supervision of Jiangsu – one of China’s richest provinces – three former local officials were named and shamed as “typical examples” of the corruption problem behind hidden local debts.

One name singled out in the provincial disciplinary watchdog’s report was Qi Biao, the former deputy director of the provincial Development and Reform Commission, who was sacked last December and expelled from the Communist Party in June.

The disciplinary violations that Qi was convicted of included “using power and position of influence to act as an intermediary for local government financing vehicles (LGFVs)”, “accepting huge amounts of property by charging intermediary fees through intermediary links”, and “pushing up local government debts”, the Central Commission for Discipline Inspection (CCDI), China’s main anti-corruption agency, said in June.

LGFVs, which flourished following the 2008 global financial crisis as a way of funding China’s infrastructure building spree, sell bonds that help provincial authorities raise money for increasing spending.

The debt raised is kept off the balance sheets of local authorities, yet it carries an implicit government guarantee of repayment. Thus, compared with more transparent local government bonds, debt raised by LGFVs can be more susceptible to corruption.

An eye-popping case of debt-related corruption last year involved Dushan county in the southern province of Guizhou, which has the highest debt ratio among provincial governments in China.

The government of Dushan, which oversees a mountainous area with a population of 360,000, had accumulated 40 billion yuan (US$6.27 billion) worth of debt as of 2019, when its annual fiscal revenue was less than 1 billion yuan.