Last year, the central government allowed local governments to raise about 1 trillion yuan ($140 billion) through bond sales to repay their LGFV debts.
In the last year, talking about the Chinese economy very often meant addressing the thorny issue of the real estate crisis which continues to limit Beijing’s economic growth to this day. However, there is another, equally relevant theme that deserves to be explored further.
We are talking about what experts and analysts define as "the time bomb" worth 13 trillion dollars (estimated by Goldman Sachs) which could jeopardize the future of China: the debt of its local administrations. A debt which, thanks to the explosion of financing vehicles for local authorities (LGFV), is largely off-balance sheet and almost rivals the national gross domestic product.
The combination of default risks by major real estate developers and the abundance of LGFV explains global investors’ concerns regarding the stability of the Chinese economy. Making matters worse, there is a worrying global backdrop to take into account: high US bond yields, Japan on the brink of recession, and a stagnant European economy.
This is why, on the occasion of the third Plenum of the XX Central Committee of the Chinese Communist Party, scheduled for 15 to 18 July, the country’s top officials will try to find a solution for the enormous local debt since accumulated here. Some say the government could allow local governments to retain a greater share of the tax revenue generated that currently flows into Beijing.
The (possible) move to stem local debt
This decision could prove to be a decisive move to increase investment in high-value-added manufacturing sectors and reinvigorate domestic consumption. More revenue would allow local governments to invest more in innovative sectors, reducing their dependence on property and land sales. All this would ultimately reduce the attractiveness of debt issuance, a practice that has spiraled out of control over the years.
From the 2008 Lehman Brothers crisis to the Covid pandemic, Beijing has relied on 34 Chinese provinces to accelerate its growth. Huge skyscrapers, highways, airports, hotels, stadiums, shopping districts, and amusement parks: LGFVs have been instrumental in financing China’s massive expansion of infrastructure, driving up land prices in a profitable growth cycle.
Before the housing market crash, land revenue seemed like an endless source of subsidies for the Dragon. A year ago, at least 10 of the regional governments were on the brink of financial abyss, to the point that the Chinese State Council was forced to send teams of expert officials to the most economically deficit areas of the country to examine the accounts of local governments and find ways to reduce their debts.
The LGFV explosion
Over the last decade, China has overused LGFVs. Of course, spending on infrastructure and property has fueled booming economic growth throughout the country, but on the other hand, it has led the various local administrations to build useless projects and, above all, to fuel the hole black of debt. The International Monetary Fund estimates that the total debt held by LGFVs is equal to 66 trillion yuan (9.1 trillion dollars): the same money used by Chinese cities to raise funds to be diverted into infrastructure projects essential for the country’s development. The point is that these vehicles have transformed into endless black holes.
Last year, the central government allowed various local governments to raise about 1 trillion yuan ($140 billion) through bond sales to repay their LGFV debts. The move, which mirrors an earlier pattern, was supposed to allow local governments to issue bonds at an interest rate of around 3%, to replace expensive LGFV debt. This solution, alone, was not sufficient to stem a worrying phenomenon. From 2015 to 2018, local governments issued about 12 trillion yuan of bonds to replace off-balance sheet debt, but liabilities continued to rise.
China’s latest move, as mentioned, could allow local administrations to retain a greater share of tax revenues. One thing is certain: rigorous control of additional debt would seem to have become one of the number one objectives of Chinese politics.
Original article published on Money.it Italy 2024-07-17 07:03:00. Original title: La Cina e la “bomba a orologeria” del debito locale da 13 trilioni di dollari
