China’s debt clean-up leaves less cash for big building projects
Certain local bonds have been diverted to repay older debt through 2028; move shows Beijing’s concern regarding finances of localities
CHINA’S push to improve the finances of cash-strapped localities will mean they have less money to spend on big infrastructure projects because for the first time funds from the sale of new local government special bonds are being used to repay old loans.
In March, Beijing said that local governments could sell 3.9 trillion yuan (S$722 billion) of the new notes this year, money that in the past has almost exclusively used to back public works. But earlier in November, lawmakers decided that starting this year they would use 800 billion yuan from the bond sales to repay older hidden debt each year through 2028.
While that should improve the overall fiscal health of provinces, cities and towns across the country, the funds will not be available to pay for roads, train stations and other building projects just as the government is trying to revive the economy so it can hit its annual growth target of around 5 per cent.
The move to divert the money underscores Beijing’s concern regarding the finances of local governments, and Chinese leader Xi Jinping has labelled local government debt one of the three “major economic and financial risks” facing his country. Most of that debt is tied to entities known as local government financing vehicles, which borrow on behalf of provinces and cities to finance investment in infrastructure.
In previous years, the size of the new local government special bond quota has served as an indicator of how much extra stimulus the government is adding. A big jump in the figure in 2020 highlighted Beijing’s push to support growth ravaged by the pandemic.
This year, local governments are facing pressure to resolve hidden debt and urgently need funds to do that. On Nov 8, officials in Beijing unveiled details of a programme to refinance hidden local debt and move it onto public balance sheets after the change was authorised by the nation’s top lawmaking body.
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Additionally, good investment projects are becoming scarce after years of rapid building and as the economy slows, and many special bond funds are being used inefficiently.
“Growth-supporting resources may actually be smaller this year” than last year due to the new swap, said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered.
Weak spending
Data on government finances show how weak official expenditure is now. Total spending by the central and local governments rose to 29.2 trillion yuan in the first 10 months of 2024, according to Finance Ministry data released on Monday (Nov 18).
That was just 1 per cent more than at the same time last year, well below the targeted increased in spending for 2024. The drop was due to an almost 5 per cent decrease in spending from local government fund budgets that are mostly dedicated to paying for land development.
Local governments funds have had their overall revenue fall 21 per cent this year, with most of that decline from the collapse in land sales. Revenue from land sales has tumbled 23 per cent from the same time last year and has more than halved from the peak in 2021.
Demand for land has been decimated by the property crash. That has also undercut the finances of many of the development companies that are effectively owned by local governments but are not included in their official balance sheets.
The money from the debt swap will go to paying off these companies – those local government financing vehicles – hopefully saving local governments hundreds of billions of yuan in repayment costs annually.
“The shortage of fiscal resources has been a large weight dragging on China’s growth this year,” said Le Xia, chief Asia economist at BBVA, who sees the fiscal austerity this year as the harshest since 2015.
Xia expects the special local government bond quota to be raised to around five trillion yuan next year.
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