Debt Risks: China’s Push to Control Hidden Local Government Debt

China’s Finance Ministry Targets Hidden Debt

The China Finance Ministry has implemented strict measures to confront hidden debt concerns, particularly forbidding local governments from incurring illegal debts related to infrastructure projects. These initiatives aim to manage debt risks stemming from significant liabilities that lack productive returns.

The Scope of the Problem

Estimates indicate that local hidden debt could reach between 30 trillion yuan (US$4.2 trillion) and 50 trillion yuan. This has raised alarms, given the historical financial practices where local governments often engage in complex borrowing scenarios to finance non-viable projects. The Ministry's proactive stance seeks to impose budget controls and approval procedures to mitigate this risk.

Impact of Property Downturn

China’s ongoing property downturn has further strained financial resources, leading to a drop in land sales. The finance ministry reported a 2.6% decrease in fiscal revenues for the first seven months of 2023 compared to previous years, intensifying the urgency for reforms. Revenues from land usage saw a dramatic drop of 40.3% year-on-year.

Future Strategies

Analysts suggest recovery will hinge on a rebound in economic fundamentals and potential issuance of treasury bonds. Wu Qiying from GF Securities highlighted the importance of adaptive fiscal policies amidst these challenges.

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