China debt: these 3 regions have the most daunting debt piles. So what can be done about it?

After years of rapid economic growth, the resources held by local governments across China have seen a worrisome decline in the midst of a slower-than-expected economic recovery and a nationwide property market downturn.

For the first time, China’s Politburo – the centre of power within the Communist Party – stipulated at a meeting last month that it was necessary to resolve debt risks at local governments with “a comprehensive solution to local government debt”.

The statement highlights the central government’s increased focus on the financial difficulties facing less-developed regions, as well as preventing systemic risks, according to a research note by Fitch Ratings on August 6.

Since the start of this year, fears have grown over a public default on repayments of debt sold by local government financing vehicles (LGFVs), hybrid entities that are both public and corporate and were created to skirt restrictions on local government borrowing and have proliferated since the global financial crisis in 2008.

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“However, we believe that the central government will avoid a bailout of troubled LGFVs, as this could create a ‘moral hazard’ risk. Provincial governments have a number of existing tools to help LGFVs, including the use of debt swaps. Other solutions may involve helping [smaller] local and regional governments dispose of LGFVs’ assets, injecting operational assets into LGFVs, requesting fiscal support from [provincial authorities], and bank-loan restructuring,” the US rating agency said.

The central government considers bailing out local governments a “moral hazard” because such practice may encourage reckless spending by local governments at the expense of taxpayers.

Some of China’s poorest provinces in terms of gross domestic product (GDP) saw their land sales decline by more than half last year. Jilin, Tianjin, Qinghai, Heilongjiang, Liaoning, Yunnan and Gansu, all suffered significant drops in revenue, according to a report by Moody’s Investors Service on August 9.

Elsewhere, in regions that have historically generated more income from LGFVs, such as Shandong and Fujian provinces, the falls have also been large, Moody’s said.

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Based on a report by Moody’s Investors Service using 2022 figures, the Post looks at China’s three provinces with the highest debt-to-GDP ratio, which compares the amount of debt in each region to the size of the economy. The debt component comprises public debt held by provincial governments and their LGFVs.

1. Tianjin (Debt-to-GDP ratio: 138.3 per cent)

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Tianjin’s real GDP growth was just 1 per cent in 2022, and its foreign direct investment has also steadily declined from 2015’s US$21.13 billion to just US$5.39 billion in 2021, according to data from Hong Kong Trade Development Council.

In 2021, the government of Tianjin introduced measures to improve the financial health of its indebted state firms following a series of defaults since 2018.

Moody’s expects that LGFVs in Tianjin will see more than half of their bonds mature in the next 12 months, although its fiscal revenue coverage of maturing LGFV bonds in the next year is relatively low.

2. Guizhou (Debt-to-GDP ratio: 137.2 per cent)

The mountainous, landlocked province in southern China – famed for the popular Mao-tai brand of baijiu liquor – has been amassing debt after years of hefty infrastructure spending. However, not all of the projects have delivered the benefits that the local governments had hoped for, despite their high price tags.

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Guizhou is currently constructing the canyon-spanning Huajiang bridge at an estimated cost of 2 billion yuan (US$276.6 million). Expected to be finished in 2025, the bridge will create a new route across the Beipan River, which is part of the great Pearl River basin. At a length of 2,890 metres (1.8 miles), with a bridge floor 625 metres above the river, the bridge will be the highest in the world, according to authorities.

Comments by Guizhou officials in April, saying that the region was not able to manage its debt repayment based on its revenue, triggered widespread concerns that the local-level debt crisis could be more serious than previously anticipated.

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3. Gansu (Debt-to-GDP ratio: 123.4 per cent)

Northwest Gansu’s GDP in 2022 totalled 1.12 trillion yuan, but its per-capita income was just 45,000 yuan (US$6,233) – the lowest among all Chinese regions, according to estimates by Luo Zhiheng, chief macroeconomic analyst of Yuekai Securities Research Institute.

“The province’s fiscal revenue is relatively small, and its dependence on central [government] transfer payments is relatively high; traditional industries contribute a relatively high proportion of tax revenue, and the gap between fiscal revenue and expenditure within the province is relatively large; the government’s debt burden is also relatively big. The debt repayment pressure is increasing, year by year,” Luo said in a research report on Gansu’s debt problems in June.

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A few LGFVs in Lanzhou, capital of the northwest province, have already been in financial trouble for a few years, damaging the local government’s ability to raise funds in the capital markets.

Moody’s expects Gansu, which faces outflows while already carrying large LGFV debts compared to fiscal revenue, will see greater difficulty in adapting to significantly less income from land sales. What’s more, Gansu also recorded net outflows of LGFV bond financing, illustrating their refinancing difficulties, Moody’s said.

Rounding out China’s top-10 worst debt-to-GDP ratios

4. Qinghai (105.8 per cent)

5. Chongqing (101.3 per cent)

6. Zhejiang (101.2 per cent)

7. Yunnan (101 per cent)

8. Sichuan (100.3 per cent)

9. Jilin (95.6 per cent)

10. Jiangxi (92.8 per cent)