China’s Local-Government Debt Doubles In 2 Years, May Roll Out Municipal Bonds In March

on December 24 2013 4:29 PM
Beijing, China
Beijing, China Reuters

China's local-government debt may have skyrocketed to about 20 trillion yuan ($3.3 trillion) at the end of 2012, or nearly double from 2010, the state-owned Global Times newspaper reports, citing a new report by the Chinese Academy of Social Sciences.

An audit into local-government debt by the National Audit Office showed the figure stood at 10.7 trillion yuan by the end of 2010.

In other figures, China's total central and local governments reached nearly 28 trillion yuan at the end of 2012, or about 53 percent of the country's gross domestic product.

“China's debt level was lower than that of major developed economies, but higher than other BRICS countries except South Africa. It is still at a moderate and controllable level," the government think tank said.

The BRICS group includes Brazil, Russia, India, China and South Africa.

China's just-ended Central Economic Work Conference said "preventing and controlling local-government debt" will be among the major tasks to be implemented next year.

The dilemma Beijing is facing is that it needs infrastructure investments to support short-term growth, but by doing so, it is building up these debt problems in the country that is going to be big trouble in the long term.

In the wake of the global financial crisis in 2008, external demand for Chinese products declined sharply, and net exports ceased to be a driving force for the economy. The government responded by engineering a monetary stimulus, but it placed the task of infrastructure spending squarely on local governments, which shoulder 90 percent of these expenditures.

And while the financing burden for infrastructure has fallen on regional governments, the provinces and municipalities have not been allowed to borrow money directly or run a budget deficit since 1994, when Beijing introduced a ban due to concerns that local authorities were building up huge debts they could not repay.

Setting up local government financing vehicles (LGFVs) was seen as the solution to this local-government financing problem. While owned by the local government, these financing vehicles can raise funds through the more traditional methods of taking bank loans, issuing bonds, and via equity market initial public offerings, as well as via shadow banking activities such as trust loans.

China’s shadow banking system is responsible for a loan portfolio that amounts to more than a third of the debt issued by traditional banks and nearly half of the country’s GDP, up from just 25 percent five years ago, according to Societe Generale's estimate.

“The root cause of the problems associated with local-government debt and shadow banking is the fact that a financial system dominated by banks can no longer cope with the demands of financing rapid urbanization,” said HSBC's chief economist for China, Qu Hongbin.

To help relieve local government’s burden, China may allow city governments to issue municipal bonds as early as next March, the state-run China Daily reported on Tuesday citing unnamed sources.

Currently, the local bond pilot remains tiny compared to the scale of local financing needs. The finance ministry in March set a quota of 350 billion yuan under the program for 2013. Only six localities -- Zhejiang Province, Guangdong Province, Shandong Province, Jiangsu Province and the cities of Shanghai and Shenzhen -- are allowed to issue bonds on their own.

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