China tries to quell fears over debt pile-up with local government data
Finance ministry says outstanding debt was at US$2.5 trillion at the end of November – within the approved ceiling
China’s finance ministry on Friday unexpectedly released local government debt figures from the end of November in an apparent move to provide reassurance that Beijing was making headway with the problem.
A mountain of local government debt is often seen as a weak link in the Chinese economy and a source of fragility for the financial system – a situation made worse by limited transparency. The debt figures are usually made public on a yearly or half-yearly basis when the finance ministry makes its budget report to parliament.
The ministry said in a statement on Friday that outstanding local government debt was 16.6 trillion yuan (US$2.5 trillion) at the end of November – within the 18.8 trillion yuan ceiling approved by the National People’s Congress for this year.
It also said that 14.7 trillion yuan of direct government debt, or 88 per cent of the total, was in the form of bonds. Local governments issued a total of 4.3 trillion yuan of bonds in the first 11 months, 2.7 trillion yuan of which was used to roll over old debts, the ministry said.
While the figures suggest the issue is under control on the surface, it is the “hidden” debt that has economists worried – borrowings by local government financing vehicles, debt racked up at state-owned enterprises owned by local authorities, and tacit credit guarantees made by local governments in private-public partnership projects.
Concern over these debts led rating agencies Moody’s and Standard & Poor’s to downgrade China’s sovereign credit rating earlier this year.
Within China, many are asking about the actual size of implicit local government debt.
“It is definitely the biggest ‘grey rhino’ [predictable] risk in the Chinese economy or financial system,” Gu Shengzu, deputy director of the Financial and Economic Affairs Committee of China’s parliament, was quoted as saying by the The Beijing News on Tuesday. “The actual figure of indiscernible debt or implicit liabilities remains unclear.”
Gu made the comments at a committee hearing about the problem on Monday, the report said.
Despite the widespread concerns, Beijing has insisted that the government debt risk is “controllable”, saying that all such debt amounted to about 37 per cent of the country’s gross domestic product based on official data.
The finance ministry has meanwhile acknowledged that many local governments conceal their debts by asking vehicles under their control to take over liabilities. For instance, the ministry last week said it found “irregular government borrowing” on some 32 projects in 15 counties of Jiangsu province in 2015 and 2016 – and 57 local officials had been punished.
Ding Shuang, chief Greater China economist of Standard Chartered Bank in Hong Kong, said the latest data will “serve as a measurable indicator or yardstick for future work”, and he expected Beijing to be stricter about controlling local government debt.
“The scale of the debt will be made clear on the government books, and growth of implicit liabilities will also be regulated in case they grow too big to ignore,” Ding said.
Chen Ji, an analyst at the Bank of Communications in Shanghai, said a more regular release of the debt data would improve transparency and pave the way for more bond issuance next year.
Bonds are needed to fund local construction, but state-owned financial institutions are losing their appetite amid the bond market squeeze.
The People’s Bank of China tried to boost their appeal last week, announcing that local government bonds could be used as collateral for borrowing from the central bank from next year.
Meanwhile the finance ministry has named and shamed municipal governments this year for providing illegal financing guarantees, and a month ago it also took on public-private partnerships – one of the main ways Beijing leverages private participation in infrastructure work.
“The key to facilitating risk prevention is to effectively control local government debt risks, firmly contain illegal guarantees and ban any fundraising activities in the name of government guidance funds, public-private partnership projects or public service purchases,” Finance Minister Xiao Jie told a conference on Thursday.