China debt: local financing vehicles scale back funding amid Beijing’s risk reduction drive

Suzhou city in east China’s Jiangsu province has announced 18 locally owned enterprises will no longer be involved in government fundraising

The announcement is in response to a campaign from Beijing to curb implicit liabilities amid fears of financial contagion in the world’s No 2 economy

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China is trying to clamp down on off-balance sheet borrowing, which has fueled local governments spending on infrastructure projects in the past. Photo: Xinhua

Published: 7:00am, 25 Mar 2023Updated: 7:42am, 25 Mar 2023

A growing number of local government-owned enterprises in China have begun pulling back from funding regional projects, aiming to transform themselves into market-driven entities as Beijing doubles down on efforts to reduce the country’s implicit debt risks.

China’s new leadership team is scrambling to get on top of financial risk, especially among local governments that had their finances stretched by Covid control measures, while at the same time witnessing a plunge in revenue from land sales and taxes.

Implicit government debt refers to liabilities the government may eventually take some repayment responsibility for, despite being generated by state-owned enterprises (SOEs) or financing vehicles.

Concerns about financial contagion have turned de-risking into a government priority over the next five years, with Beijing establishing a powerful new agency, the Central Finance Commission, to oversee the issue at the “two sessions”.

The government will maintain high pressure on local debt management and reduce implicit liabilities

Tan Yiming

Authorities are also keeping a close eye on potential spillover from turbulence generated by the collapse of Silicon Valley Bank in the United States.

“Overall, the government will maintain high pressure on local debt management and reduce implicit liabilities,” Tan Yiming, an analyst of Minsheng Securities, wrote in a note earlier this month.

Suzhou city in east China’s Jiangsu province announced in mid-March that 18 locally owned enterprises will no longer undertake government fundraising and will be responsible for their own profits and losses.