The huge debts of cities and provinces are a stumbling block to recovery, and reduce Beijing’s ability to stimulate the economy. The emblematic case of Guizhou, whose debt rate reaches 61.8% after large investments in tourist facilities that remain empty. The Wuhan Municipality Finance Office published an advertisement in a newspaper requesting that government agencies settle outstanding tax debts.
Beijing () – China’s Gross Domestic Product (GDP) grew by 6.3% annually in the second quarter of 2023, but only because the base of comparison is low: in the same period of 2022, China was still struggling with the closures. Analysts believe that this growth does not at all reflect the real economic situation in China. Also because meanwhile inflation has stabilized due to weak demand, producer prices have plummeted by 5.4% (they are at their lowest level in the last seven years) and exports have collapsed by 12.4 % in June. All these data expose the fragility of the recovery.
Compared to the first quarter, GDP growth is 0.8%, well below expectations. The unemployment rate among young people between the ages of 16 and 24 climbed to 21.3% in June, a new record. And the same spokesman for China’s National Bureau of Statistics, Fu Linhui, admitted that China faces a complex international geopolitical and economic context. Nonetheless, he said the country can still reach its 5% annual growth target by 2023.
Beyond the international scene, there is an element that is totally Chinese and contributes to slowing down the recovery: the debts of local administrations. The main stimulus driver, infrastructure works, is becoming unsustainable. The independent research institute Rhodium Group conducted research by taking 205 cities and analyzing the annual financial reports of 2,892 local government funding vehicles. The results show that at least 102 Chinese cities are experiencing financial difficulties. In half of the 205 cities studied, interest payments represent at least 10% of their fiscal resources. This threshold suggests that there are difficulties in managing debt costs.
The real estate crisis and the debt cancellation campaign are looming over local authorities, whose financial situation has been worsened by the collapse of tax revenues during Covid. According to the Rhodium report, government finances are so weak that they prevent Beijing from using fiscal policy to support the recovery.
Analysts anticipate increased risks in less developed inland regions. The report shows that the interest charges incurred by Lanzhou (northwest) and Guilin (southwest) last year exceeded their fiscal capacity. In some regions, local governments are urging banks to extend maturities and lower interest rates due to rising debt obligations. There are also hidden bonds – issued by local governments for infrastructure investments – that have been kept off the balance sheet to avoid central government oversight. In several provinces, this has generated greater concern among investors due to the risks that the growth of municipal debt entails.
It was the same local governments that publicly exposed the debt problem. In April, the southwestern province of Guizhou openly asked Beijing for help. With a debt ratio of 61.8%, Guizhou could be the first Chinese province to file for bankruptcy. In recent years, this province, one of the poorest in China, has been engaged in infrastructure works to accelerate its growth. In the tourism sector, picturesque works were erected that, however, failed to attract tourists, leaving unfinished buildings and empty cities. In another province, Yunnan, (in southwestern China) the local administration ensures that tax revenues are only enough to cover the salaries of public employees.
Earlier this year, thousands of retirees took to the streets of Wuhan (the city where Covid broke out) after the government cut their health care. The protest showed that China’s social security system must deal with the pressure of an aging population. The “zero Covid” policy has made matters even worse, as mass swabs and lockdowns have depleted Health funds as well as government tax revenue. In May, the Wuhan Municipal Finance Office published an ad in a local newspaper urging debtors, many of whom were government agencies and state-owned enterprises, to pay immediately.
Many cities are mired in debt. However, in statements to the state agency xinhua, Beijing officials assured that the overall financial status is healthy and safe and the debt ratio is not high. In January of this year, the Chinese Ministry of Finance had assured that there was no rescue of the hidden debts contracted by local governments. But in the following months, the administrations of several provinces fell into default.
Beijing once admitted to the existence of hidden debts – which arose after the 2008 global economic crisis – but the Chinese central government today chooses to ignore them. The International Monetary Fund has estimated that Chinese local government debts have risen from 40 trillion yuan (5 trillion euros) in 2019 to 66 trillion yuan (8.2 trillion euros) at the end of last year.
Goldman Sachs estimated in May that China’s total public debt reached 23 trillion dollars, equivalent to 126% of GDP. The Chinese banking system has yet to receive around 94 trillion yuan (11.76 billion euros) of local government debt. Precisely because of the huge debts of local authorities, Goldman Sachs has downgraded the credit rating of some Chinese state-owned banks, warning that exposure to loans and portfolio losses could hurt earnings. China’s state-run Securities Times responded by saying the downgrade was based on “downbeat assumptions.”
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