Some of China’s most indebted provinces and municipalities appear to be facing their moment of reckoning. With governments in such regions having yet to devise clear plans to restructure or reduce debt, investment and economic growth are already sputtering.
Tianjin, one of China’s four municipalities directly under the administration of the central government, saw its fixed-asset investment slump by more than 20 per cent in the first three quarters of 2023, year on year, bringing its gross domestic product (GDP) growth – 4.6 per cent in that period – below the national average of 5.2 per cent.
The city’s property-development investment in the first nine months of the year almost halved, year on year – a sign of less fiscal revenue, including from land sales, as fewer people buy homes.
Its infrastructure investment, usually led by the government, also dropped by 12.6 per cent in the period.
The total debt owed by Tianjin’s government reached 864.55 billion yuan (US$118 billion) by the end of 2022, according to Guangdong-based Yuekai Securities, while Tianjin’s total fiscal revenue – including transfer payments from the central government – was less than 300 billion yuan last year.
Guizhou, a poverty-stricken southern province that used to rack up debt to boost investment and the local economy, also saw its GDP growth, at 4.8 per cent in the first three quarters, trailing the national average. The province’s property sector investment dropped 16.5 per cent during the period.
Guizhou’s total government debt was 1.247 trillion yuan in 2022, compared with its fiscal strength of 760 billion yuan.
Yunnan, another province that has amassed huge debt, booked year-on-year GDP growth of 4.4 per cent from January to September. Its fixed-asset investment contracted by 8.8 per cent. The province’s total debt was 1.2 trillion yuan in 2022, around 500 billion higher than its fiscal income that year.
Fujian, Liaoning, Chongqing, Jilin and Qinghai provinces all saw their outstanding debt surpass 1.5 times what they held in their coffers last year.
Only Jiangsu, Shanghai, Shanxi and Tibet had more fiscal income last year than their debt, according to the Yuekai report.
In addition to the risk of more payment defaults, local governments may have to rack up more debt to pay off the old debt.
Luo Zhiheng, chief economist at Yuekai Securities, said China’s less-developed regions need attention from the central government.
Since September, some provinces have issued more than 900 billion yuan (US$123 billion) worth of refinancing special bonds to repay off-balance-sheet debt.
More than 840 billion yuan worth of local-government special-refinancing bonds will be issued this month, and Yunnan, Liaoning and Inner Mongolia will each account for at least 100 billion yuan, according to the China Securities Depository and Clearing Corporation.
But questions remain about the effectiveness of Beijing’s fresh debt-swap plan to let local governments issue special bonds to pay off debt.
“This marks China’s first step, but a debt-swap programme of 1 trillion yuan alone is insufficient,” Serena Zhou, a senior China economist at Mizuho Securities Asia, wrote in a recent report.
Xia Lei, chief economist with Sealand Securities, also said local governments should swap their debt piles with low-interest bank loans and sell some assets owned by local authorities or invite private investors to be co-owners, to pay back debt.
Finance vice-minister Zhu Zhongming said the funds from the sovereign debt sale would be transferred to local governments, with the central government responsible for the principal and interest payments to ensure there is no additional debt burden on local authorities.