China is to accelerate new debt issuance to shore up growth amid calls from the national legislature for measures that could “scientifically determine the scale” of the country’s medium and long-term liability level.
The Ministry of Finance said it would supervise and accelerate the issuance of local government bonds, according to the 2022 budget report by finance minister Liu Kun to the top legislature.
As of the end of May, 2.25 trillion yuan (US$311 billion) of new bonds had been issued, Liu said, according to a copy of last week’s speech, which was published on Tuesday.
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“[We will] give full play to the guiding role of government investment, appropriately expand the scope of investment in local government special-purpose bonds and the scope of project capital, make good preparations for projects, improve the quality of project reserves, and give priority to supporting mature projects and projects under construction,” Liu said.
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He added that efforts would be made to prevent “blind” expansion of investments, as well as to attract more private capital.
Liu also pledged “strict” supervision of local government debt, while the ministry will “expose” authorities that violate debt rules in a bid to “warn” and “deter” such practices.
The statement comes amid growing concerns over the sustainability of local government debt, which has risen to a record high.
The National People’s Congress’ (NPC) Financial and Economic Affairs Committee responded to the budget report by calling for measures that could “scientifically determine the scale” of the country’s medium- and long-term liabilities.
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China’s slower-than-expected economic recovery, coupled with a property downturn, have also added pressure to local government finances.
Land sales in 100 cities were only 65 per cent of the 2019 level in the second quarter of 2023, compared with 84 per cent in the first quarter, putting more pressure on local governments, Macquarie Group said.
Meanwhile, between 2020 and 2022, local government debt increased by an average of 10 trillion yuan (US$1.38 trillion) annually, according to Minsheng Securities on Tuesday.
By the end of 2022, the total debt had grown by 2.6 times that of 2015 to surpass 90 trillion yuan, the securities house added.
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Beijing has told local governments to curb so-called hidden debts, which are mostly from off balance borrowing via local government financial vehicles (LGFVs), but that carry an implicit government guarantee.
Special-purpose bonds were introduced in 2015 by Beijing to encourage on-budget lending, although they only make up a fraction of the borrowing needed for infrastructure spending, meaning LGFVs remain the go-to platform.
There are no official figures of the size of China’s hidden debt, but analysts have estimated that it could be somewhere between 30 trillion yuan to 50 trillion yuan.
But China’s National Audit Office reported last week that dozens of regional and local governments had inflated fiscal revenues and added to hidden debt last year.
US rating agency Moody’s said on Monday that the findings reflected mounting fiscal pressures faced by local governments, particularly lower-tier authorities.
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Ulanqab, a city in the northern Inner Mongolia autonomous region, is the latest local government that has publicly said it is facing difficulties to meet its debt reduction targets for the next 10 years.
The city government said on its WeChat account last week that it is “unsustainable to rely solely on fiscal measures to hold its bottom line” and that there are “fewer and fewer channels” to meet its debt curb objectives.
It added that there is not much effort from local officials to find ways to resolve the problems, although the post on China’s largest social platform has been subsequently removed.
Shi Yaobin, deputy head of the NPC Financial and Economic Affairs Committee, said hidden debts are still piling up and financial discipline is not being strictly enforced by local governments.
“Combined with the tracking and judgment of economic development trends and regional fiscal revenue and expenditure, scientifically determine the scale of China’s medium- and long-term local government debt and the level of debt quotas by region,” Shi said in a statement last week responding to the Ministry of Finance budget report.
“Further strengthen the construction of a market-oriented and law-based debt default mechanism. Promote local governments to report their debts to the NPC,” added Shi, who is also director of the NPC Standing Committee’s Budgetary Affairs Commission.
While there are also calls asking the central government to allocate fiscal resources to pay some of the LGFV debt and issue government bonds to repay, or swap with, LGFV debt, Gao Ruidong, chief macro economist at Everbright Securities, believes the chances are slim.
“First, the urgency for the implementation of large-scale replacement bonds is not strong. Second, judging from the central government’s statement, the willingness to provide assistance is not high, and there is considerable resistance to the launch of this measure,” Gao said on Tuesday.
“At present, it is difficult to completely eliminate hidden debts through fiscal funds, disposal of state-owned assets, and interest rate cuts in various places. The market-oriented transformation of LGFVs is the ultimate way to reduce debts.”
Former finance minister Lou Jiwei said in March that it is not accurate to believe that hidden debt problems emanated from Beijing’s push for costly infrastructure projects at local government levels.
“The local governments do have a lot of burden, but through large-scale central transfer payments, the local financial resources are sufficient,” Lou wrote in Bijiao, a magazine edited by prominent Chinese economist Wu Jinglian.
Lou said that there were some local governments that wished to outcompete others for higher growth by taking on too much leverage.
“The economy has turned to achieving high-quality growth, and this pattern has done more harm than good. In addition to effectively curbing the rise in hidden debt of local governments and actively resolving the existing debt problems, fundamental reforms in the division of powers and expenditure responsibilities are required,” Lou added.
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