Dysfunctions
Local governments are still seeking ‘illegal’ funding as tax revenues fall due to the slowdown in the economy
By Cissy Zhou, SCMP, 7 Mar, 2019
Mar 9, 2019 - 1:07:44 PM

By the end of February, local governments had issued 307.8 billion yuan (US$46 billion) of special-purpose bonds, the majority of which will be used for high-profile infrastructure projects.By the end of February, local governments had issued 307.8 billion yuan (US$46 billion) of special-purpose bonds, the majority of which will be used for high-profile infrastructure projects.

China will stop local governments accumulating further debt as it deals with 33.35 trillion yuan (US$5 trillion) of total outstanding government debt, Finance Minister Liu Kun said on Thursday.

Liu, speaking during the National People's Congress, confirmed the level of total outstanding government debt for 2018 was within the budgeted limit of 36.69 trillion yuan.

Liu said the risk from the current level of local government debt is “very low” and “generally controllable”, noting that China’s government debt-to-gross domestic product (GDP) ratio was 37 per cent, “much lower” than the European Union’s limit of 60 per cent.

As part of its effort to stabilise the slowing economy, Beijing has eased off its deleveraging campaign to reduce debt and risky lending. It has not abandoned its efforts to control the increase in debt and avoid the massive rise in lending that was part of the huge economic stimulus package after the global financial crisis 10 years ago.

However, local government tax revenues are falling due to the slowdown in the economy, and income from land sales is also slowing due to growing weakness in the property markets. This is forcing cash-strapped local governments to continue to seek ways around central government debt limits to gain access to new sources of credit, adding to their hidden debts.

Liu said that his department would not “shy away from the [subject of] hidden debts” held by local governments.

“I have to admit that there are still some local governments borrowing through financing platforms, which is illegal as it is beyond their statutory [borrowing] limit,” he said. “We are taking strict measures and won’t allow any new cases to emerge. We have been monitoring local financial institutions and local financing platforms and quite a lot people have been held accountable [for these illegal activities].”

Beijing has long been trying to clamp down on local government borrowing, but it has evolved into a cat-and-mouse game as local authorities find new and creative ways to circumvent Beijing’s restrictions to gain access to credit.

The government is trying to turn hidden off-budget debt into on-budget public debt by allowing local government to issue bonds and use the proceeds to buy back the hidden debt, although the actual size of the China's hidden government debt remains in question.

I have to admit that there are still some local governments borrowing through financing platforms, which is illegal as it is beyond their statutory [borrowing] limit. Liu Kun

Last year, S&P Global Ratings said in a report that China’s local governments may have accumulated as much as 40 trillion yuan (US$6 trillion) worth of “hidden debt” that is not reflected in official figures, which is “a debt iceberg with titanic credit risks” to the world’s second biggest economy.

If all the hidden debt was included in total government debt, China’s debt-to-GDP in 2017 would jump to 60 per cent, a prudent limit for developed countries that matches that of the European Union.

Beijing has increased the support for local governments this year, allowing authorities to issue 2.15 trillion yuan (US$320 billion) worth of special purpose bonds, up 59 per cent from last year, Liu said.

The proceeds are used to fund local infrastructure projects and are not included on the balance sheets of municipal authorities. To help jump-start infrastructure spending in 2019, the government approved the limit for special-purpose bond issuance at the end of last year.

By the end of February, local governments had issued 307.8 billion yuan (US$46 billion) of special-purpose bonds, Liu added. The majority will be used for projects including the Xiong’an New Area, the Belt and Road Initiative, the “Greater Bay Area”, as well as other high-profile infrastructure projects