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Struggling with debt, local governments across China call for help from Beijing

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June 04, 2023

This article was originally published by Radio Free Asia and is reprinted with permission.

Authorities in the southwestern province of Guizhou have hired a state-owned debt management company, as analysts warned of a potential financial crisis sparked by “domino-like” bankruptcies among local authorities.

China Cinda Asset Management has sent a panel of experts to the province in a bid to “prevent and defuse various risks and offer stronger financial services,” to the local government and state-owned enterprises, the company announced in a WeChat post cited by the state-run China Daily newspaper on April 25.

Cinda specializes in the “reform and risk mitigation of small and medium-sized financial institutions,” acquiring their distressed debt assets and investing in trusts, default bonds, judicial auction funds, according to a March 29 report in the same newspaper.

The company facilitates “local government-led regional bailout and risk mitigation of large real estate groups” and mergers and acquisitions of “high-quality real estate enterprises,” the paper said, adding that it had already intervened in the central province of Henan, where it set up a 10-billion yuan bailout fund for the purpose of bailing out property developers.

Official figures released ahead of the National People’s Congress showed that China’s public revenue totaled more than 20 trillion yuan last year, while expenditure topped 26 trillion yuan, an increase of 6.1% on the previous year, finance minister Liu Kun told a March 1 news conference in Beijing.

Lockdowns, quarantines and testing

Local governments have been hit by the triple whammy of increased pandemic spending while absorbing tax reductions, exemptions and early tax refunds, as the ongoing downturn in the real estate industry has led to a sharp drop in land transfer fees, which once accounted for 40% of local fiscal revenues, analysts have told Radio Free Asia in recent interviews.

Financial analysts have estimated that around one-third of public expenditure last year went on the rolling lockdowns, mass quarantines and compulsory daily COVID-19 testing programs of ruling Chinese Communist Party leader Xi Jinping’s zero-COVID policy, which ended in December.

The policy has left local governments struggling with an ever-mounting debt burden, prompting officials to borrow more to pay back old debts, and to raid the coffers of medical insurance funds to make ends meet, resulting in cuts to medical benefits and mass protests in major cities in February, they said.

Bloomberg cited official data in a Feb. 27 report as saying that at least 17 of China’s 31 provinces and municipalities are facing severe fiscal deficits, with local borrowing exceeding 120% of income, which the Ministry of Finance set as a “warning level” for local government debt in 2020.

Guizhou, with a population of nearly 40 million, recently issued a rare public appeal to the central government for assistance, despite warnings from Beijing in January that there would be no bailouts, sparking fears that it could be the first Chinese province ever to go bankrupt.

The government announced on its website on April 11 that its financial and fiscal research teams had visited a number of cities to discover the extent of the problem, and concluded that there is a “significant and urgent” problem that “can’t be effectively resolved by this government alone.”

Local governments struggle

Commentators saw the report as tantamount to a direct appeal to Premier Li Qiang for central government support.

“I think we’re going to see a domino effect, as more provinces in the southwest follow Guizhou’s lead and start sending out warning signals about bankruptcy,” Beijing-based financial analyst Si Ling told RFA in a recent interview.

“Local governments declaring bankruptcy could affect public opinion, and put pressure on China’s central government, namely the State Council and the Ministry of Finance,” he said.

He said if the financial crisis spreads to richer regions of China, such as the Pearl River and Yangtze River delta regions, it could spark an international sell-off of China’s sovereign debt.

“If one local government after another goes bankrupt, then even the central government and the People’s Bank of China won’t be able to buy up the piles of sovereign debt that will be sold off on international money markets,” Si said. 

There are already signs that other governments are also struggling, with two county governments in the southwestern province of Yunnan recently announcing they had set up special task forces to address mounting debt.

Authorities in Yunnan’s Tongchong county said on April 24 that they could barely make their payroll given the current schedule of repayments.

Financial commentator Si Ling said the fact that local governments like those in Yunnan are openly talking about the problem suggests they have reached the end of the line.

“Economic recession has undermined the ability of governments to pay back their loans,” Si said. “When the financial crisis breaks, it will affect everyone.”

“Local debt crises and huge debt burdens, governments going bankrupt, all of that could really happen, and happen all at once in an overwhelming way,” he warned. “The Chinese government won’t be expecting it, because it has never happened before.”

China’s local government debt exceeds U.S.$9 trillion (about 61.55 trillion yuan), and continues to increase, according to a recent Reuters report.

‘No choice but to borrow’

Yunnan resident Xiao Tai, who gave only a nickname for fear of reprisals, said the local government in his local region of Xishuangbanna is in debt to the tune of 16 billion yuan, and is already falling behind on wages to civil servants.

“Everyone is in debt,” he said. “The central government is rich, and so are the banks, but ordinary people and local governments have no money.”

He said many people in China, faced with a tanking economy, poor job prospects or unpaid wages, are being forced to borrow just to survive.

“Ordinary people used to be afraid of owing tens of thousands of yuan, but now they have no choice but to borrow hundreds of thousands,” he said. “If they don’t borrow, they will have nothing to live on.”

He said moves are afoot where he lives to get property developers to build heavily subsidize housing for civil servants in lieu of wages, and to issue supermarket vouchers to enable people to buy daily necessities, staving off public unrest over unpaid wages.

But he said much of the central government funding allocated to the region as part of “poverty alleviation” schemes had disappeared. “There are many reasons why there is no local fiscal revenue, and the biggest of them is corruption,” Xiao Tai said.