China’s cities are struggling to pay their bills from three years of Covid and a real estate crash

Hong Kong
CNN
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three years Strict pandemic control in China and a real estate crash has drained the locality government coffers, leaving authorities across the country struggling with mountains of debt. The problem has become so severe that some cities are now unable to provide basic services and the risk of default is increasing.

Analysts estimate China’s outstanding government debt exceeded 123 trillion yuan ($18 trillion) last year, of which nearly $10 trillion was called “hidden debt” by the Chinese government. local government risk financing platforms backed by cities or provinces.

As financial pressure increases, the region governments are said to have cut wages, cut transport services and reduced fuel subsidies in the middle of a harsh winter.

Thousands of people in the northern province of Hebei have difficulty heating their homes in November and December because of the lack of natural gas, according to many Chinese media reported. The government subsidy cut is partly to blame, according to the state news site twinning.

In January, in the northernmost province of Heilongjiang, households in Hegang City were also affected remaining without heat after local companies severely limited supply. Companies blamed the move on a lack of government subsidies.

The lack of heating in the dead of winter has led to widespread complaints on social networks. The central government in Beijing responded by ordering cities to provide enough heating, but did not specify who would pay the bills.

Local government has exhausted their budget after spending huge sums on regular Covid lockdown enforcement, mass testing and previous setup of quarantine centers Policy change in Decembersignaled the abrupt end of Xi Jinping’s Covid-free policy.

“Beijing is facing an economic minefield of its own making,” said Craig Singleton, a senior fellow at the Foundation for Defense of Democracies in Washington. “All told, China’s current debt crisis represents a perfect storm.”

It is not yet clear how much the country has spent in total to fight the pandemic. But one province, Guangdong, disclosure that it spent $22 billion to eliminate Covid in the three years from 2020.

Revenue, meanwhile, fell sharply year-on-year. The application of prolonged blockade measures has severely reduced household income, causing many to reduce spending, which in turn leads to less tax revenue for local governments. Massive tax breaks to support businesses through the pandemic also reduce government revenue.

Complicating matters further is the slump in the housing market; house price declined for 16 consecutive months. Land sales, which typically account for more than 40% of local government revenue, Collapsed.

Last year, several cities stopped bus service due to budget constraints, including Leiyang in Hunan province and Yangjiang in Guangdong, according to operator announcements.

Separately, Hegang, a city in Heilongjiang province, made history in early 2022 by becoming the first city to be forced to undergo a fiscal restructuring because of heavy debt, based on state media reported. As a result, it must cut spending on infrastructure projects, reduce government subsidies to industries, stop hiring new employees and sell assets, according to the report. Rule announced by the State Council.

Public sector jobs, considered the safest in the country, is also affected elsewhere. In June, several wealthy eastern provinces – including Guangdong, Zhejiang and Jiangsu – slashed wages by as much as 30%, according to Chinese news site Caixin.

“China’s local debt poses a serious threat to the country’s overall economic health and will weigh heavily on China’s nascent recovery,” Singleton said.

This debt hinders the government’s ability to promote growth and job stability, and maintain or expand public services, he said.

“There is no doubt that China’s current debt crisis has the potential to exacerbate existing socioeconomic tensions,” Singleton said, adding that the new government protests they like those at the end of 2022 may appear, when Chinese citizens accept “work disappears”, business is closed and reduced wages.”

China’s local government debt has grown significantly in the decade before the pandemic, largely as a result of the state-led investment boom that followed the 2008 global financial crisis, but the situation has deteriorated rapidly over the past three years.

Last year, local government debt rose 15% to 35 trillion yuan ($5.2 trillion), according to data released by the Ministry of Finance on Sunday. Interest payments on local government bonds exceeded one trillion yuan ($148 billion) for the first time in history, according to state media.

Debt that is backed by local governments but does not appear on their balance sheets can be much larger.

“Hidden debt” is issued by local government financial vehicles, entities created by local governments to avoid borrowing limitations and used to finance infrastructure spending, could total 65 trillion yuan ($9.6 trillion) in value by mid-2022, according to recent estimates by analysts at Mars Macro, an economic research firm based in China. Hunan.

This is 20% higher than the 53 trillion yuan estimate given by Goldman Sachs in 2021.

That is equivalent to more than half of China’s GDP. Overall, China’s government debt is now equivalent to 102% of GDP, analysts estimate.

That debt ratio is still lower than America’swhich now about 122%, based on national debt and GDP in 2022, but China has grown at an astounding rate, more than doubling from 47% in 2016.

There are already signs that local governments are having trouble paying their debts.

In early January, a struggling government-owned company in the southwestern province of Guizhou responsible for building infrastructure projects announced that lenders had given them an additional 20 years to repay a $2.3 billion loan. Loan renewal with such a long time frame is extremely rare in China.

Analysts said the incident signals that local governments are under severe financial pressure this year. Their debt squeeze could pose a serious threat to China’s financial system, especially arrive small regional banks.

“Once defaults begin, indicating that government guarantees have been broken among LGFVs [local government financing vehicles]Allen Feng and Logan Wright, China analysts at Rhodium Group, wrote in a research note last week.

“As a result, there is a significant risk of financial contagion,” they said. “Commercial banks in small cities and rural areas are particularly vulnerable due to their deep relationships with local governments.”

Even the country’s top officials admit that one of the biggest threats to financial stability in 2023 is the potential debt of local governments, which is huge and difficult to handle. follow.

The central government in Beijing has signaled that it will not come to the rescue.

“If it’s your baby, you should hold it yourself,” the Treasury warned in a statement earlier this month aimed at local authorities. “Central government will not bail [you] outside.”

But Beijing may have to allow province and city to borrow more.

The Chinese economy is in a severe recession. GDP only 3% growth last year, the second worst growth in 46 years.

The previous government resorted to the old play of encourage local governments to borrow more money to finance infrastructure projects that drive growth. In December, an infrastructure push helped boost economic activity, leading to signs of stabilizing growth.

In January, Bloomberg reports that Chinese authorities are looking at record quotas for special local government bonds this year.

Adam Liu, assistant professor at the National University of Singapore, said: “So far, it seems that Mr. Xi desperately needs a quick economic recovery and has chosen to put the debt issue aside for later. .