As China’s local governments struggle to repay debts, should Beijing shoulder some of the burden?

China’s local government debt crisis is approaching a tipping point as concerns over city and county government default risks mount and Beijing’s willingness to offer enough support to avert a meltdown is questioned.

Late last month, Kunming, capital of the southwestern province of Yunnan, denied online reports that its local government financing vehicles (LGFVs) were having difficulty repaying debt after one of them was involved in a last-minute scramble to repay 2 billion yuan (US$282.3 million) on May 21.

LGFVs were created to aid off-budget financing, especially for infrastructure spending, but weak disclosure requirements have led to concerns about hidden debt risks.

In April, a government think tank in Guizhou warned that the province, which neighbours Yunnan, could not manage its debt on its own and needed help from the central government. The report was subsequently removed by censors.

Over the past few years, Beijing has stepped up its supervision of local government debt in a bid to curb risks and has said that local governments should not count on a state bailout.

But Yu Yongding, a prominent economist and former central bank adviser, said the central government’s approach of relying on local governments to sort out their debt problems was wrong.

“Local governments are the offspring of the central government, and the central government must also assume certain responsibilities,” Yu wrote in a blog post published on May 4 by the Economists 50 Forum, a Chinese think tank.

“Importantly, resolving local government debt should not lead to a further decline in economic growth. Of course, moral hazard cannot be encouraged. Those who are directly responsible for causing the deterioration of local debts should also bear corresponding responsibilities.”