China Broadens Program Bringing Local Debt Out of Hiding

03 Aug 2023

More local Chinese governments are applying to swap their hidden, short-term, high-interest debt for lower-cost, longer-term government bonds as authorities attack trillions of dollars of hidden liabilities across all levels of government.

Provincial governments of Fujian, Guizhou, Yunnan, Jiangxi and Guangzhou kicked off work for some municipal and county-level governments to apply for inclusion in a national pilot program to defuse local government debt risks.

Ministry of Finance data showed that governments across China had 37 trillion yuan ($5.1 trillion) in on-book debt outstanding at the end of April, but there is no publicly available official data on the current scale of hidden debt. Many analysts including those at the International Monetary Fund estimate the total could range from 30 trillion yuan to more than 70 trillion yuan.

At a July meeting, the Communist Party’s powerful Politburo emphasized the need to effectively prevent and defuse local debt risks and proposed for the first time to formulate and implement a package of local government debt reduction programs.

A new round of audits of local hidden debt is being carried out, and how to resolve the debts remains to be clarified, Caixin learned from people familiar with the matter.

The State Council defined hidden debt in 2018, describing it as any borrowing that is not part of on-budget government debt but carries an explicit or implicit guarantee of repayment using fiscal funds or is backed by illegal guarantees. It mainly includes bonds issued by local government financing vehicles (LGFVs), state-owned companies set up to finance local government investment such as infrastructure projects including highways and bridges. Debt is also hidden in public-private partnership projects, shady loan contracts and other channels used by local governments to raise money.

Concern about the risks to the financial system and the sustainability of local government finances from trillions of yuan of invisible liabilities has stretched to the pinnacle of policymaking.

Some local Chinese governments were found to be adding new hidden debt, the national auditor said in a report last month.

Forty-nine local governments added a total of 41.5 billion yuan of new hidden debt by promising to buy back debt or advancing funding for state-owned enterprises, auditors found.

The Ministry of Finance in 2019 and 2020 conducted two rounds of trial programs to allow county-level governments to convert hidden debt into on-the-books government bonds. Selected counties in six provinces including Guizhou and Yunnan, mostly impoverished regions, were included in the 2019 round, which swapped 142.85 billion yuan of debt. The 2020 round was more inclusive and exchanged 612.8 billion yuan of debt.

Four trillion to 4.7 trillion yuan of local government hidden debt will need to be swapped in 2023, Citic Securities Co. Ltd. analysts led by chief economist Ming Ming estimated in a report published in February. The figures are based on an estimate that 9.2 trillion to 10.8 trillion yuan of LGFV debt will need to be repaid and swap bonds will be needed to deal with a chunk of it.