China’s central government likely to pitch in as localities attempt to untangle debt knots

Name: Anger mounts as China's property debt crisis leaves flats unfinished
Uploaded: 2024-01-10T23:00:25.000Z
Duration: 4 min 49 s
Description: Anger mounts as China's property debt crisis leaves flats unfinished

Local governments appear out of tools to handle tremendous debt burdens on their own, so central authorities are expected to take hands-on role

Fiscal expansion, central bank financing, special bonds all mentioned as possible levers for driving growth through infrastructure spending

Reading Time:3 minutes

Why you can trust SCMP

The central government is likely to step in to aid localities in their debt woes, financing infrastructure to boost activity. Photo: Bloomberg

Amanda Lee

Published: 7:00am, 11 Jan 2024Updated: 8:49am, 11 Jan 2024

China’s central government is likely to take on more responsibility for public infrastructure spending to steady economic growth, policy advisers said, as the property market has yet to stabilise and many regions continue to grapple with debt.

After years of borrowing, the ledgers of many of China’s local governments are deep in the minus column thanks to a sluggish economy and a downturn in real estate.

The International Monetary Fund estimated in a report last year the total debt for China’s local government financing vehicles (LGFVs) had swollen to a record 66 trillion yuan (US$9.8 trillion). Over half of the debt cannot be serviced by current earnings alone, the financial agency said, if average LGFV funding costs are more than 3 per cent.

04:49

Anger mounts as China's property debt crisis leaves flats unfinished

LGFVs are hybrid entities that are both public and corporate and were created to skirt restrictions on local government borrowing. They have proliferated since the global financial crisis in 2008.

Wang Yiming, central bank adviser and former vice-president of the Development Research Centre of the State Council, said that China’s growth model, based on debt-fuelled investment and land sales, has become difficult to sustain.

Wang estimated that over 10 per cent of LGFV debt is channelled into new projects, with the rest used to repay the principal and interest on existing debt. Going forward, Wang said, fiscal policy at the central government level will have to play a major role in buttressing the economy.

We cannot rule out the resumption of monetary tools

Zhang Ming, Chinese Academy of Social Sciences

“Debt accumulated in the past has led to huge repayment and risk exposure, and as such it has inhibited the demand for investment [that it has been funding],” Wang said at the 2024 China Bond Market Forum in Beijing on Friday.