China’s local government debt problem needs attentive reforms to resolve
Published: Nov 04, 2023 10:50 PM


The recently concluded central financial work conference, held in Beijing from Monday to Tuesday, pledged to construct a strong financial industry in China, through improving financial services tailored for high-tech sector advance and green transformation, ramping up all-around financial supervision covering banks, insurers, funds, futures, equities and bonds, pushing forward financial development with Chinese characteristics and do utmost to prevent systemic risks from disrupting China's growth.

As widely expected, the mounting debt incurred by China's local governments in the past years and the slowdown of the all-important property sector were highlighted at the crucial meeting, which is convened every five years. Senior policymakers vowed to establish a long-term effective mechanism to help tackle local government debt issues and "optimize the structure of central and local government debt."

As to the real estate sector, the document passed by the meeting noted that housing developers' "reasonable financing needs" will be satisfied, a signal that the cash-stricken developers will be given more access to credit lines from Chinese banks. And, the policymakers emphasized that private and state-owned property developers will be treated equally.

Policymakers are set to pave the way for further steps to tackle and defuse local governments' debt problems, including a special intra-government debt management mechanism to demarcate and optimize central and local government debts, so as to take better measures to resolve local debt issues.

While China's central government debt is only 20 percent of the GDP, total local government debts are estimated at nearing 38.75 trillion yuan ($5.31 trillion), according to media reports. Though the volume of the debt amassed by local Chinese governments is considerable, it remains within the approved limit set by the National People's Congress, at 42.17 trillion yuan.

China's statutory government debt ratio is lower than the levels of major developed market economies. Overall, the risk remains manageable, officials say. A few foreign media outlets have been hyping up China's local government debt levels and the financial risks associated with the real estate sector, but their reports are largely inaccurate, because the debt has always been present on the radar of policymakers.

The central financial work conference assumes a higher-level perspective to coordinate economic development and financial security, which will help resolve local debt problems properly. During the past three years from 2020 to 2022, the government at different levels reached deep into their pockets and spent heavily to contain the COVID-19 pandemic, which caused a rise in local government debt levels. And, the pandemic led to a housing-sector slump including a lull in land sale -- significantly reducing a major revenue stream for local governments.

By whatever metrics, more effective measures should be thought out to assist local governments cope with their debts. For instance, the state-owned giant banks could help roll over existing local government debt with longer-term loans at lower interest rates, a sensible step to help defuse local debts. And, local governments could be allowed to repay their arrears due this year and in 2024 through debt extensions or new bank loans to replace existing loans.

The issuance of special-purpose refinancing bonds will also help ease local governments' burden. For example, the central government could replace hidden liabilities faced by local governments with publicly issued bonds. As of the end of October, more than 20 provincial-level provinces and regions had issued more than one trillion yuan worth of such securities to swap existing debt, according to media reports.

To offer more help, the policymakers recently decided to issue an additional one trillion yuan in treasury bonds before December 31 this year, and all the proceeds will be transferred to local governments - an effective step by the country to expand central borrowing while preventing local governments from incurring more hidden debts. The measure will also help optimize debt structure between the central and provincial governments. Around 500 billion yuan is intended to be used within 2023, while the remaining half will be used in 2024.

The issuance of additional debt by the central government will provide extra policy support and more ammunition to re-engineer a stronger and faster economic growth in China. Given flat consumer prices across the country, officials could make the fiscal policy more supportive, like the one-trillion special bond issuance. China last month reported its third-quarter GDP grew by 4.9 percent, beating expectations and bolstering forecast for full-year growth of at least 5 percent.

Ever since the official kick-off of the reform and opening-up drive in 1978, China's fiscal system has been focusing on facilitating economic growth. Fiscal funds were primarily used for infrastructure and other investments to drive development, with the local governments taking the large chunk of infrastructure build-up in their jurisdictions. However, as China's total population has started to decline, coupled with the slowdown in real estate development, the fiscal system needs to be further restructured. It is a sensible move to control local government debts from expanding at a rapid pace.

The author is an editor with the Global Times.