Civil servants in wealthy cities like Shanghai are reportedly having their pay slashed. PHOTO: REUTERS
MAY 22, 2023, 5:17 PM SGT
BEIJING – In 2021, a remote coal town
in north-eastern China was forced to undergo an unprecedented financial restructuring.
Its struggles since are an ominous sign for President Xi Jinping as other
heavily indebted municipalities look set to follow suit.
Hegang,
a city with nearly a million people near the Russian border, had debt of more
than double its fiscal income when it hit the headlines almost 18 months ago.
Its
residents are now feeling the brunt of the fiscal clampdown. During a recent
visit to the city, locals complained about a lack of indoor heating in freezing
winter temperatures, and taxi drivers said they were being penalised with more
traffic fines. Public school teachers worried about rumoured job cuts, and
street cleaners endured two-month delays to their salaries.
Hegang
represents just the tip of the iceberg of a local government debt problem that
is making investors increasingly nervous, and that threatens to be a drag on
the world’s second-largest economy for years to come.
Goldman
Sachs estimates that China’s total government debt is about US$23 trillion
(S$31 trillion), a figure that includes the hidden borrowing of thousands of
financing companies set up by provinces and cities.
While
the chance of a municipal default in China is relatively low given Beijing’s
implicit guarantee on the debt, the bigger worry is that local governments will
have to make painful spending cuts or divert money away from growth-boosting
projects to continue repaying their debt.
“Many
cities will become like Hegang in a few years’ time,” said Mr Song Houze, an
economist at American think-tank MacroPolo, noting that China’s ageing and
shrinking population means many cities do not have the workforce to sustain
faster economic growth and tax revenue.
“The central government may be able to
keep things stable in the short term by asking banks to roll over local
governments’ debt,” Mr Song said.
But
without loan extensions, “the reality is that over two-thirds of the localities
won’t be able to repay their debt on time”, he added.
In
Heilongjiang province, where Hegang is located, bond investors are already wary
of the risks. The province’s outstanding seven-year bond had an average yield
of 3.53 per cent, 18.8 basis points higher than the average nationwide, ranking
it among the top four most expensive.
A
fiscal restructuring can be triggered in one of two ways: if interest payments
on a municipality’s bonds exceed 10 per cent of its expenditure, or if local
leaders deem it is necessary.
China-based
Yuekai Securities estimated that as many as 17 cities had bond interest
payments of more than 7 per cent of their budgeted expenditure in 2020, meaning
they are close to breaching that 10 per cent threshold. The cities are mainly
in poorer provinces like Liaoning in the north-east and Inner Mongolia up
north.
Unlike
a corporate debt restructuring, a fiscal restructuring in China does not imply
that creditors must take losses on what they are owed.
Problems
are evident in other cities as well.
Shangqiu,
a city of 7.7 million people in China’s central Henan province, made headlines
recently after almost shutting down its only bus service. In Wuhan and
Guangzhou, proposed cuts to pensioners’ medical benefits prompted rare street
protests earlier in 2023. Civil servants in wealthy cities like Shanghai are
reportedly having their pay slashed. In Guizhou province, officials have begged
Beijing for a bailout.
Beijing
has been pushing local governments to curb debt risks for years, especially the
“hidden” kind – referring to debt raised by financing vehicles on behalf of
municipalities, but which does not show up on the balance sheets of the localities.
Finance Minister Liu Kun and other officials have sought to ease public
concerns by saying local government finances are overall “stable”.
Stanford
University political science professor Jean Oi, who specialises in China’s
fiscal reforms, said: “The local government debt problem is spread throughout
the country. While rich coastal areas will have more opportunities to repay
their debt and more resources to draw on, less-developed places like Hegang are
going to be much more limited in what they can do.” BLOOMBERG
https://www.straitstimes.com/business/china-s-31-trillion-local-debt-mess-is-about-to-get-worse
China’s $23 Trillion
Local Debt Mess Is About to Get Worse
What happened in cash-strapped Hegang points to
a long economic slog for the rest of the country.
By Bloomberg News
May 21, 2023, 11:00 PM
UTC
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