China’s ‘hidden debt’ drive controls borrowing for municipal infrastructure projects

Local governments in China urged to ‘follow approval procedures’, ‘ensure money sources’ and ‘strengthen budgetary controls’ of projects

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Contractors working on the Machanghe grand bridge along the Guiyang-Pingtang Expressway in southwest China’s Guizhou province. Photo: Xinhua

Published: 6:30pm, 27 Aug 2024

China’s finance ministry has banned local governments from raising illegal or non-compliant debt for municipal infrastructure projects that yield no or insufficient returns, in a bid to curb so-called hidden debt.

On Monday, the Ministry of Finance, along with five other ministries, revealed they had urged local governments at the end of July to “follow approval procedures”, “ensure money sources” and “strengthen budgetary controls” of infrastructure projects to prevent debt risks.

As part of the rules concerning municipal infrastructure asset management, revenue generated from infrastructure financed by local government special bonds must be prioritised to repay the bonds and cannot be diverted for other uses.

While no official figures have been provided on the level of local hidden debt – comprising mainly local government financing vehicle debts, including loans and bonds – estimates suggest it could be between 30 trillion yuan (US$4.2 trillion) and 50 trillion yuan, compared to China’s gross domestic product of around 126 trillion yuan last year.

In 2018, the Ministry of Finance asked local governments to clean up hidden debt within five to 10 years, which it said at the end of 2022 had shrunk by more than one-third.

In response to the concerns on local debt risks, the finance ministry stressed on Monday that risks were overall “controllable,” with the scale of hidden debt “gradually declining”.