China’s provinces fall deeper into local government debt mire, study finds
- Only Shaanxi reported a decline in debt ratio by June 2020, according to joint review
- Nine provinces, including Guizhou and Inner Mongolia, had a ratio of above 100 per cent
The debt problem for all but one Chinese provinces is worsening as local authorities continue to rely on borrowings to finance big-ticket spending programmes, according to a joint review of local government finances.
The review revealed that with the exception of the hinterland province of Shaanxi, debt ratio, measured as outstanding debt to local GDP, rose in 30 of 31 mainland provinces as of the end of June 2020.
The assessment was released in the Local Government Bond Blue Book 2021, jointly published by the National Debt Association of China, a society under the Ministry of Finance, and China Chengxin International Credit Rating, the country’s biggest credit rating firm.
In all, 23 of the provincial areas had a fiscal balance ratio – a measure of debt repayment ability – below 50 per cent. The ratio is calculated as the share of budget revenues to budget expenditure. The results mean that most provinces are relying on transfer payments from Beijing or new debt to maintain fiscal balance.
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Chinese regional and local governments sold 5.7 trillion yuan (US$886 billion) worth of bonds in the first nine months of 2020, Moody’s Investors Service said in a recent report. That amounted to nearly 36 per cent higher than the same period last year.
Their outstanding debt totaled 25.6 trillion yuan at the end of September and was expected to reach 26 trillion yuan by the end of 2020, pushing their average debt burden close to 100 per cent of revenue, analysts led by Shanghai-based Amanda Du wrote in the report.
More than 78 per cent of new debt issues were long tenors maturing in 10 years or longer, the Moody’s report showed. As a result, the weighted-average maturity of notes sold by regional and local governments bonds increased to 15 years, prompting Beijing to call for improvements in their debt structure.
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Despite unprecedented support by Beijing to help provinces shore up their economy from the coronavirus shock, only 26 of the provinces posted gains in the first nine months last year. Regional disparities persisted, ranging from a contraction of 10.4 per cent to an increase of 6.3 per cent over this period, Moody’s said in the report.
While Guangdong, Jiangsu and Shandong, the country’s three richest provinces, had the most debt, the debt ratio was above 100 per cent and particularly risky in nine provinces: Guizhou, Inner Mongolia, Liaoning, Ningxia, Tianjin, Qinghai, Yunnan, Jilin and Hunan.
In the rust-belt province of Liaoning, for instance, 62 per cent of the bonds issued in the first half of 2020 were used to repay existing debts, the highest proportion in China.
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Chinese local authorities have also incurred debt through local government financing vehicles – which appear as “corporate” borrowings on paper – as well as state firms under direct control and private-public partnership projects.
The National People’s Congress, the top legislature, budgeted a local government debt limit of 33 trillion yuan by the end of 2021. China’s total outstanding local government debt was 26.2 trillion yuan as of the end of March, Ministry of Finance data showed.
According to the blue book, China’s new local government bond issuances will reach about 4.62 trillion yuan this year. The funds raised via local government bonds this year will be used for “new infrastructure” construction, new urbanisation and capital expansion for some projects via special bonds, it said. Since 2015, local government bond issuances had surged, maintaining an annual growth rate of 50.4 per cent, it added.
