According to public data, in the first seven months of this year, China issued about 4.2 trillion yuan in local government bonds, bringing the total local government debt in China close to 100 trillion yuan. It is widely expected that August, September, and October will be the peak period for local government bond issuance.
Experts analyze that Chinese local governments are now struggling even to pay interest, suggesting that the time for a complete collapse of local government debt crisis is getting closer.
With the continuous deterioration of local government finances, localities are increasingly relying on issuing bonds to finance and alleviate the debt crisis. Official data from the Chinese government shows that in the first seven months of this year, local governments issued about 4.2 trillion yuan in bonds, with refinancing bonds accounting for approximately 2 trillion yuan.
Local government bonds are divided into refinancing bonds and new bonds, with the former being used to repay maturing local government bond principals or existing debts, following a “borrow new to repay old” approach. The latter funds are mainly allocated to major infrastructure projects such as construction.
Regarding local government bond issuance, Chinese-American economist Li Hengqing from the U.S.-based Information and Strategic Research Institute mentioned that the government is facing a shortage of funds given the extensive debt burden.
Li pointed out that various sources indicate that local government debt in China has already reached around 94 trillion yuan. This poses a challenge as the annual interest payment alone could amount to 3 trillion yuan, making it difficult for the government to service its increasing debts adequately.
Looking at the official figures as of the end of June 2024, the total local government debt balance in China stood at 42.6 trillion yuan. However, estimates from Goldman Sachs in August 2023 suggest that the cumulative local government debt in China could be as high as 94 trillion yuan, including debts from local government financing platforms (local implicit debts).
These financing platforms’ debts, considered off-balance-sheet liabilities, represent the hidden debts of local governments. Li mentioned that even President Xi Jinping himself is unsure about the accurate figures amidst this concerning trend.
Li estimated that with the existing local government debt at 95 trillion yuan and the newly issued 4.2 trillion yuan, the total local government debt is approaching 100 trillion yuan. This situation hampers the ability to pay both principal and interest, hindering further development initiatives and assistance to the populace.
The dynamics of local debt repayment are weak, with local governments struggling to generate sufficient funds to meet their financial obligations. The recent emphasis on increasing the issuance of special bonds signifies an urgency to address these financial challenges. Experts predict a significant acceleration in local government bond issuance in August and September, with issuance amounts expected to be around 2 trillion yuan.
Li highlighted that the bonds typically have long maturity periods of 10, 20, or even 30 years, resulting in uncertainty about future repayments. This could lead to the accumulated debts eventually turning into liabilities that are difficult to manage, ultimately becoming burdensome for local authorities.
He emphasized the lack of enthusiasm among investors due to concerns about the government’s ability to repay these debts, with doubts arising around the safety of these assets. The ownership of nearly 100 trillion yuan in local government bonds remains a crucial question to address.
Li pointed out that major state-owned enterprises and large state-owned banks are often coerced to purchase these bonds, as they are deemed “patriotic debts” which must be acquired. However, the ultimate responsibility for the repayment of these debts typically lies with the banks, ultimately leading to a cycle of debt crisis affecting their liquidity.
Reports from Goldman Sachs have lowered the rating of these banks due to their substantial exposure to local government debt risks. As the situation intensifies, with the crisis nearing a breaking point, the potential for a severe collapse is becoming increasingly imminent.