Growth in local govt debt seen slowing

By Zhang Ye and Liu Tian Source:Global Times Published: 2015-6-28 23:43:01

Issue still a problem despite swap program: experts


Workers at a railway construction site in Ganzhou, East China's Jiangxi Province Photo: CFP

China's local government debts have grown at a slower pace since the beginning of the year, but several local authorities are still facing big pressure in paying their debts, the National Audit Office (NAO) said Sunday.

By the end of March, total local government debts had grown 0.1 percent from the beginning of this year, and county-level governments' debts dropped 3.5 percent over the same period, Liu Jiayi, the auditor general with the NAO, was quoted as saying Sunday in a statement on the NAO website.

However, debt is still a big problem for local governments, as the economic slowdown has led to tightened credit and a fall in local government revenues because of the tepid property market, analysts said.

According to NAO data, China's local government debts had reached a total of 10.9 trillion yuan ($1.76 trillion) by June 2013, and an unnamed official at the Ministry of Finance was quoted by China News Service in April this year as saying that the debts had reached 16 trillion yuan.

Furthermore, 1.86 trillion yuan of local government debts are due to mature this year, and paying the debts will be a huge challenge for some local governments, said the NAO. 

"2015 will be the year when local governments' debt pressure reaches a peak, amid the country's weak economic performance," Liu Xuezhi, an analyst at Bank of Communications, told the Global Times Sunday.

China's first-quarter GDP grew by 7 percent, the slowest rate since 2009.

In order to help local governments refinance their debts and rev up the economy, the Ministry of Finance announced in early June a second round of the program to allow the local authorities to swap debts for bonds, following the first 1 trillion yuan debt swap launched in March.

Both the two rounds allow local governments to swap debts for low-interest bonds, and the second debt for bond swap, which is also worth 1 trillion yuan, is expected to save local governments about 50 billion yuan in terms of annual interest payments, recent media reports said.

Liu from Bank of Communications said the debt swap scheme would ease the pressure on local governments, adding that it could help China's yearly growth for 2015 to reach the 7 percent target set in March by Premier Li Keqiang.

"I think there will be a third round of the debt swap program soon. This may help local governments to increase their infrastructure investment, which would be significant in supporting China's economic growth," Liu noted.

However, Qiu Yanying, partner and chief strategist at VStone Asset Management Co, held a different opinion.

The debt swap scheme only offers temporary relief for local governments, and will not offer an ultimate solution to the debt problem in the long run, Qiu told the Global Times Sunday.

Governments at all levels need to tackle industrial overcapacity and encourage high-end manufacturing and emerging industries to boost industrial upgrading, which will promote a new economic cycle, said Qiu.  

Some local governments have tried other ways of raising financing.

East China's Jiangsu Province was among the first batch of provinces to launch an auction of municipal bonds. In May, the province sold 52.2 billion yuan of bonds at interest rates ranging from 2.94 percent for three-year bonds to 3.41 percent for 10-year bonds, according to information on the local government's website.

Other provinces like North China's Hebei Province, East China's Shandong Province and Central China's Hubei Province, have reportedly followed suit, media reports said. 

However, Liu from the NAO said that most of China's local governments have not issued bonds yet.

Issuing bonds to the public requires local governments to have a more transparent fiscal system and management mechanism, and it takes time for the governments to embrace this new method of financing, said Liu from Bank of Communications. But it involves much lower risk than shadow banking and should be encouraged, he said.



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