China’s debt restrictions are debilitating at local levels, and Beijing should ease up, advisers urge

As leaders push forward a new stimulus plan, heavily indebted governments across China are still feeling the effects of a crisis that threaten to stand in the way of recovery

Beijing is urged to shoulder a greater share of the debt burden and allow local-level authorities more time to settle off-balance debt

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Local governments across China often rely on infrastructure projects to boost economic output, but this can create considerable debt. Photo: AFP

Published: 8:00am, 20 Jun 2023Updated: 8:05am, 20 Jun 2023

Beijing should be more tolerant of mounting debt among local governments while sharing their burden and allowing for more time to rectify the situation, Chinese policy advisers have said amid rising concerns over heavily indebted localities.

The suggestions came as a looming local debt crisis has not only sparked widespread worries over the health of China’s financial system, it is also threatening to curtail the effects of Beijing’s stimulus plan – discussed by the State Council on Friday – to revive the faltering economy.

Beijing should also consider postponing the deadline for local governments to defuse off-the-books debt, while raising the warning line for their debt ratio, said Zhao Quanhou, a researcher with the Chinese Academy of Fiscal Sciences, an affiliate of the Ministry of Finance.

The central government should raise the debt warning line to 150 per cent, the upper limit suggested by the International Monetary Fund (IMF), as many local authorities have already surpassed the current warning line of 120 per cent, Zhao said last week at a seminar in Wuxi, Jiangsu province.

He also urged Beijing to extend the time given to local governments to handle their hidden debts – referring to off-budget borrowings often occurring in financing vehicles or other state-owned firms – by three years, to ease their burden.

By doing so, he explained, local governments would not be so preoccupied with repaying and defusing debt, and thus supportive fiscal policies could more effectively “stabilise investment and stimulate consumption”.

There is no official data on the existing scale of hidden debt. Former finance minister Lou Jiwei said at a forum in January that the total was estimated to be between 30 trillion yuan (US$4.2 trillion) and 50 trillion yuan as of 2020.