China’s debt-heavy local governments look for new ways to raise cash

link: https://www.cnbc.com/2023/03/27/chinas-local-governments-finding-new-ways-to-raise-money-amid-debt-concerns.html

According to S&P Global Ratings analysts, Chinese Local governments' direct debt exceeding 120% of their revenue in 2022, a value greater than the unofficial debt level set by Chinese Authorities. The analysts further said that “The country’s provinces and municipalities have relied heavily on expanded bond issuance to carry them through a COVID-triggered economic slowdown and collapsed land-sale revenues.” 

IMF data paints a similar story, showing that China's explicit local government debt almost doubled over the last five years to 35.34 trillion yuan ($5.14 trillion), without including other categories of debt such as "local government financing vehicles (LGFVs), which allowed regional governments to tap into bank loans to complete infrastructure projects, which are also rapidly growing. This phenomenon may have been brought about by the real estate slump in China, along with the Covid-19 pandemic, which cut into local government revenue. 

The response from Beijing to this worrying growth in local government debt came in the form of an entire section in the annual work report dedicated to preventing and defusing major risks in real estate and local government debt, stating that "We (the government) should… prevent a build-up of new debts while working to reducing existing ones." This, coupled with the conservative 5% growth target set forth by Beijing may signal a shift in focus from high growth to tackling financial risk and hidden debt in local governments, an assumption further validated by recent key speeches from the Chinese president, Xi Jinping, calling on officials to address systemic risks in the Chinese economic system, along with tackling corruption at all levels of the government. The country's health spending increased by almost 18% in 2022, with revenue from land sales dropping by 23.3%, and all land is state-owned in the PRC.

Local governments will most likely turn to three channels to boost revenue, with them being taxes, asset sales, and transfers of funds from the central government. We can already see this phenomenon, with central government asset transfers increasing by 17.1% in 2021, with an additional 3.6% (10.06 trillion yuan) pm the way, according to the Chinese Ministry of Finance. Transfers to local governments accounted for about 60% of the increase in central government fiscal deficits, the S&P analysts said. 

A few local governments have resorted to other means of raising funds, by means of selling quotas for China's rapidly expanding bike-sharing industry for more than 45 million yuan in Zhangjiajie city, and 189 million yuan in Shijiazhuang.