Local administration debts weighs heavily on post-Covid recovery in China
The huge debts of cities and provinces are hindering the recovery, reducing Beijing's chances of stimulating the economy. The emblematic case of Guizhou which has a debt rate of 61.8% after huge investments in tourist facilities that have remained empty. The Wuhan Municipal Finance Bureau published an advertisement in the newspaper asking government agencies to pay off outstanding tax debts.
Beijing (AsiaNews) - China's gross domestic product grew by 6.3% on an annual basis in the second quarter of 2023, but only due to the low comparison base: in the same period of 2022, China was still in full lockdown.
Analysts believe that this growth does not reflect China's real economic conditions at all. Also because in the meantime inflation has stabilized due to weak demand, producer prices have fallen sharply by 5.4% (they are at their lowest in the last seven years), exports have collapsed by 12.4% in June. All data that highlight the fragility of the recovery.
If compared to the first quarter, GDP growth is 0.8%, well below expectations. The unemployment rate among 16-24 year olds rose to 21.3% in June, a new record. And the same spokesman for the Chinese National Bureau of Statistics Fu Linhui admitted that China is facing a complex international geopolitical and economic context, while arguing that the country can still achieve its annual growth target of 5% for 2023.
Beyond the international framework, however, there is an all-Chinese element that contributes to curbing the recovery: the debts of local administrations. Indeed, infrastructure construction as the main driver of stimulus is becoming unsustainable.
Independent research institute Rhodium Group conducted a survey of 205 cities and the annual financial reports of 2892 local government financing vehicles, and the results show that at least 102 Chinese cities are in financial difficulty. Half of the 205 cities surveyed have interest payments that represent at least 10% of their fiscal resources, a threshold that suggests difficulties in managing debt costs.
The housing crisis and the debt relief campaign are haunting local authorities, whose financial conditions have been aggravated by the collapse of tax revenues during the Covid. According to the Rhodium report, it is precisely the weakness of local government finances that prevents Beijing from using fiscal policy to support the recovery.
Analysts expect increased risks in less developed inland regions. The report shows that the interest charges of Lanzhou (Northwest) and Guilin (Southwest) exceeded their fiscal capacity last year. In some regions, local governments are urging banks to extend maturities and cut interest rates due to rising debt obligations.
There are also hidden bonds issued by local governments for infrastructure investment and kept off balance sheet to avoid central government oversight. All this has led to investors' concerns about the risks associated with municipal debt growing in several provinces.
Local governments themselves have publicly brought the debt problem to the fore. In April, the southwestern province of Guizhou openly asked Beijing for help. With a debt ratio of 61.8%, there are fears that Guizhou could be the first Chinese province to file for bankruptcy.
As one of China's poorest provinces, it had focused on building infrastructure in recent years to accelerate its growth. In the tourism sector, works have been built in scenic locations but have failed to attract tourists, leaving behind unfinished buildings and empty cities. In another southwestern province, Yunnan, some local governments said that tax revenues could only guarantee employee salaries.
Earlier this year, thousands of retirees took to the streets in Wuhan, the city where Covid broke out, as the government cut their health care. The protest showed the pressure of an aging population on China's social security system.
The "zero Covid" policy has made matters even worse, as universal testing and lockdowns have depleted healthcare funds, as well as draining government tax revenues. In May, the Wuhan Municipal Finance Bureau published an ad in a local newspaper urging debtors, many of whom were government agencies and state-owned companies, to pay immediately.
Although many cities are trapped in the swamp of debt, Beijing officials told state-run Xinhua News Agency that the overall financial status is healthy and secure and the debt ratio is not high. The Chinese Finance Ministry in January had assured that no bailout was made for the hidden debts of local governments. But in the following months there was a default of the debts of the local administrations of several provinces.
Although Beijing has admitted the hidden debts - which emerged from the global economic crisis of 2008 - the Chinese central government today chooses to ignore them. The International Monetary Fund has estimated that local government debts have increased from 40 trillion yuan (5 trillion euros) in 2019 to 66 trillion yuan (8,260 billion euros) at the end of last year.
Goldman Sachs estimated in May that China's total public debt reaches 23 trillion dollars, equal to 126% of GDP; and the Chinese banking system holds about 94 trillion yuan (11.76 trillion euros) of local government debt.
Precisely because of the massive 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 profits. China's state-run Securities Times countered by saying the downgrade was based on "pessimistic assumptions."
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