According to a government-linked think tank, China’s local governments had 14.8 trillion yuan (US$2.3 trillion) of debt last year and that amount could rise even further this year.
Liu Lei, a senior researcher at the National Institution for Finance and Development, has said that due to the pandemic, local governments have been under pressure to increase infrastructural investment and boost growth, driving a 6% increase in unplanned borrowing.
Currently, the hidden debt includes funds raised by government-related entities for public projects, including for real estate development and infrastructure, that carry a tacit obligation of repayment. This funding technique is called local government financing vehicles. Bonds traded by local government financing vehicles (LGFV) enable provincial authorities to raise money and boost spending without incorporating such funding on their official balance sheets.
China has promised to stabilize its macro leverage ratio and reduce the government debt ratio this year to control for additional risks. According to Liu, this goal could be challenging to achieve since on-budget spending can’t cover the investment needed to propel the economy’s targeted growth.
“Local governments will find ways to increase hidden debt because they are under pressure to expand investment,” Liu told Bloomberg. “In the longer term, the economy still faces lots of headwinds, including an uncertain external environment and an aging population.”
China doesn’t have an official account of local governments’ hidden debt, but different organizations’ assessments could significantly vary. One estimate by S&P Global Ratings in 2019 put the size at 20 trillion yuan, while another that same year from Rhodium Group put it at 41.2 trillion to 51.7 trillion yuan.
Liu’s calculation includes bonds issued by LGFVs and borrowing by government-linked trust funds, insurers and other investment firms. This calculation doesn’t account for bank loans to LGFVs, which may be used on commercial projects instead of public welfare projects.
According to Bloomberg’s calculations, local governments will have to repay approximately 2.14 trillion yuan worth of LGFV bonds this year.
According to reports, the hidden debt could have led to over 700 billion yuan annually in additional interest payments. Such borrowing accumulates more cost to services than government bonds and generates risks to China’s financial system’s security. This risk could also cause the debt to permeate various financial institutions, including banks, brokerages and trust funds.
Last year’s increase came after the country’s debt plummeted from a peak of 16.6 trillion yuan in 2016. Chinese authorities modified some of the borrowing into government bonds and moved them onto official balance sheets.
According to the Institute of International Finance, the total Chinese debt across all sectors (household, government and corporate) rose to about 318% of the gross domestic product (GDP) in the first quarter of 2020. Based on early signs, Beijing seems open to fiscal policies that will enable China’s economy to stay afloat but potentially increase China’s debt exponentially.
According to reports from SCMP, some categories of debt are seeing exponential growth. The report also highlights that consumer debt is among the fastest-growing portion of the debt, particularly in mortgage and consumer loans.
In line with this, the National Institution for Finance and Development emphasized that overall household debt increased to 57.7% of China’s overall GDP in the first quarter of 2020. China’s external debt grew to $2.09 trillion over the first quarter of 2020.
According to financial experts, China’s mounting national debt in the long-term will constitute severe obstacles and hazards, stunting economic growth and forcing Beijing to combat long-term wage stagnation and regulate private consumption. Doing this will, in turn, create a reiterative process in which shoppers have limited access to disposable income and consume less across the board.
However, most domestic consumers cannot understand the concept of a national debt crisis and why it would be such a risk.
According to a Chinese Academy of Social Sciences study, China’s population will peak at 1.44 billion by 2029, entering an “unstoppable” decline. Fewer people means a reduced influx of domestic consumption, therefore swiftly impeding economic growth.
A high national debt also depicts a generational grievance, as younger consumers are punished more due to older generations’ miscalculations. Reports predict that these miscalculations will cause Chinese millennials and Gen Zers to adopt frugality and spend more conservatively.
According to multiple reports, China is on the verge of a tipping point and if Beijing does not address long-term economic irregularities, the country may lack the fiscal bandwidth to contend with the next financial or health crisis.
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