A government linked think tank in China has said that last year, the total hidden debt of the country’s local governments was at 14.8 trillion yuan ($2.3 trillion) and that figure could rise even further in the current year.
According to Liu Lei, a senior researcher at the National Institution for Finance and Development, there was pressure during the pandemic slump on the local governments to increase their investments in infrastructure to spruce up growth which resulted in a 6 per cent growth in the off-budget borrowing from a recent low of 13.9 billion yuan in the third quarter of 2019.
The funds raised by government-related entities for infrastructure and other public projects were included in the hidden debt and they have an implicit government guarantee for repayment of the debts. One of the examples of how provincial authorities raise money for greater spending without having to include that debt and spending in their official balance sheets is by the way of issuing of bonds sold by local government financing vehicles, or LGFVs.
In order to reduce its overall debts risks, China has adopted a strategy to steady its macro leverage ratio and bring down the government debt ratio this year. But Liu, whose organization is controlled by the influential state-run Chinese Academy of Social Sciences and advises the government, said that achieving those targets would be tough this year because the investment needed to drive the economy’s targeted growth by 2035 is not possible through the on-budget spending only.
“Local governments will find ways to increase hidden debt because they are under pressure to expand investment,” said Liu in an interview. “In the longer term, the economy still faces lots of headwinds including an uncertain external environment and an aging population.”
There is no official account of local governments’ hidden debt in China because it is against the law technically and estimates by different institutions could vary significantly.
The calculations of the total hidden debts of the local government were made on the basis of bonds issued by LGFVs as well as money borrowed by government-supported trust funds, insurers and other investment firms. The calculations exclude any bank loans taken by LGFVs wherein such debt could have been used for financing commercial projects and not on public welfare projects.
He said that since the borrowings included in the hidden costs are costlier to service compared to government bonds, therefore more than 700 billion yuan a year in extra interest payments resulted from these hidden debts. The large hidden loans also pose a threat to the stability of Chinese financial system
Stability of the Chinese financial system also faces a threat from these large hidden debts of local governments because such debts have been purchased by a variety of financial institutions, including banks, brokerages and trust funds, Liu added.
China has been able to reduce its hidden debts by its local governments since they reached a peak of 16.6 trillion yuan in 2016 until 2019 because the Chinese government transformed some those debts into government bonds and moved them onto official balance sheets
(Adapted from NDTV.com)