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China economy

Just how big is China’s ‘hidden’ debt pile? Beijing orders local cadres to find out

Lower-level authorities told to assess the scale of back-door financing and come up with ways to tackle it

PUBLISHED : Friday, 17 August, 2018, 9:01pm
UPDATED : Saturday, 18 August, 2018, 11:36pm

China’s ruling Communist Party and cabinet have ordered local authorities to stop amassing “hidden” debt as part of Beijing’s bigger push to head off catastrophic financial risks.

The order was sent to municipal governments throughout the country, according to official reports of cadres meeting to study the threat.

The full text of the order has not been released but the official Hunan Daily reported on Thursday that provincial governor Xu Dazhe ordered cadres “to follow requests from the central leadership to get a clear picture of hidden local government debt as soon as possible and then make plans to address it”.

Officials in Jingzhou and Yunxi county in Hubei province and the county of Kangle in Gansu also met to examine the instructions, reports on government websites said.

Zhao Quanhou, a senior researcher with the Ministry of Finance’s Chinese Academy of Fiscal Sciences, said the debt curbs were an effort to cut leverage in the economy, listed by President Xi Jinping as the country’s overriding economic priority.

“[The order] is intended to rein in [hidden debt] and pave the way for it to be tackled in the future,” Zhao said.

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At the same time, the ministry has told local governments to sell bonds as quickly as possible to raise funds for infrastructure spending.

“Speeding up the issuance of special bonds is a way to open wider the front door to financing” while Beijing gradually closed the back door to illicit fundraising, Zhao said.

The size of “implicit” local government debt – including credit guarantees for borrowings by local government financing vehicles, local state-owned enterprise debt and public-private investment schemes – is unclear but Chinese lawmaker Yin Zhongqing has said it could be at least 20 trillion yuan (US$2.9 trillion).

By comparison, China’s explicit local government debt, including bonds approved by Beijing, totalled at 16.8 trillion yuan by the end of June.

Neither the ministry nor the National Audit Office (NAO) has given an official estimate of the country’s “hidden” debt but the NAO has named six cities for hiding a combined 15.4 billion yuan of “implicit” government debt as the end of last year, with the city of Shaoyang in Hunan alone amassing 7.2 billion yuan.

Hefei, the capital of Anhui province, released a statement last week saying it had “implicit” debt of 47.5 billion yuan as the end of 2017, equivalent to 72 per cent of its confirmed debt. Huangnan, a region in the poor province of Qinghai, said local implicit liabilities reached 2.4 trillion yuan by the end of May – nearly four times its confirmed total by the end of last year.

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The murky world of local government borrowings has long been cited as a weak link in the world’s second-biggest economy. Moody’s and S&P downgraded China’s sovereign credit by one notch last year because of concerns over the situation.

It is also a source of vulnerability for Beijing as the trade war with the United States brings headwinds. Analysts said confidence in China’s economy could be dealt a huge blow if the true scale of the hidden debt was revealed.

Li Yuze, a fixed-income analyst at China Merchants Securities, said that if the “implicit” debt was factored in, the national ratio of government debt to GDP could surge from the present 36.7 per cent past the red line of 60 per cent set by the Bank for International Settlements.

Li also said Beijing might not have strictly defined implicit debt in the local government order fearing “it could trigger market expectations of a second wave of debt swaps”.

Larry Hu, chief China economist at Macquarie Capital in Hong Kong, said there was no immediate solution to the long-standing debt problem, and although deleveraging was a secondary consideration for Beijing, the latest order signalled that Beijing wanted local authorities to be discreet and responsible in their borrowing.

“Still, we could see the first debt default of a local financing vehicle in coming months,” Hu said.