China local governments face debt squeeze worth $2 trillion

Bloomberg

Signs are growing in China that local government debt burdens are becoming unsustainable.
China’s 31 provincial governments have a stockpile of outstanding bonds that’s close to the Ministry of Finance’s risk threshold of 120% of income. Breaching that line could mean regions will face more regulatory hurdles to borrow, hampering their ability to drive up economic growth.
In addition, local authorities will face a massive maturity wall over the next five years as bonds worth almost 15 trillion yuan ($2.1 trillion) —more than 40% of their outstanding debt — fall due.
While there’s little risk of provincial governments defaulting, they will run into increasing difficulty in repaying their debts. More and more bonds will need to be sold to roll over maturing ones rather than to finance new spending and as a result, investment growth may suffer.
A major cause of the financial squeeze is the property crisis. Revenue from land sales —which in the past made up about 30% of local governments’ income — has plummeted. On top of that, trillions of yuan in tax breaks were doled out to businesses to help them cope with the economy’s slowdown over the past few years.
The central government recently acknowledged for the first time concerns about special local bond repayment risks, urging Shenzhen, the technology hub that neighbors Hong Kong, to consider setting up a provision fund to prevent debt payment risks. Shenzhen’s finances are in better shape than many other cities or provinces, and it’s a sort of test area for fiscal reforms.
At an October meeting of the standing committee of the National People’s Congress, the country’s parliament, some delegates warned it would be “difficult to repay as scheduled” local government debt maturing in the next couple of years. They called for contingency plans to be made early.

Under Pressure
Economists like Ding Shuang at Standard Chartered Plc say the national government should take on more of the debt burden by borrowing more. Yu Yongding, a former central bank adviser, and other economists made a similar call in a report earlier this month, saying the central government should sell more debt, particularly of general bonds which could be used to invest in infrastructure.
“It should be the central government, rather than provinces, to add leverage — regional finances have turned quite weak over the past few years,” Ding said. “The government will come under more and more pressure to make the change. It is a matter of time.”
China set the risk threshold for provincial debt at 120% of their “comprehensive financial resources” — widely regarded as the combined income from the general public budget and the government fund budget, as well as transfer payments from the central government.