Set for 6% growth? 2021 China’s GDP still depends on debt expansion

In early March, the two sessions of the Communist Party of China set GDP growth at 6% in 2021, with the fiscal deficit rate (deficit to GDP ratio) set at 3.2%, estimated at about 3.44 trillion yuan (RMB, same below), and another 3.65 trillion yuan in special local government debt. In the view of the financial community, China’s economic growth model in 2021 will still rely on debt expansion.

Financial sources are concerned about the sustainability of the CCP’s government debt. According to the disclosure, about a quarter of the provincial governments in China will spend more than half of their revenues on debt servicing.

Former Communist Party finance minister Lou Jiwei told a fiscal forum a year ago that fiscal support for economic and social development “simply cannot be sustainable by relying on deficits and debt.” The mainland magazine Fiscal Studies recently published his speech at the forum.

According to data released by the Ministry of Finance of the Communist Party of China at the end of January this year, the national government debt balance at the end of 2020 totaled 46.55 trillion yuan. Among them, the balance of local debt is 25.66 trillion yuan and the balance of central government debt is 20.89 trillion yuan. This works out to a national government debt ratio (debt balance to GDP) of 45.8%, close to the lower limit of the cautionary red line of 60%.

This is only the fiscally recognized debt ratio, not counting the “hidden debt” of local governments that is not included in the fiscal books. According to the 21st Century Business Herald, it is generally estimated that the balance of local “hidden debt” will be about 40 trillion yuan by the end of 2020.

In his speech, Lou Jiwei admitted that the Chinese government’s debt problem is increasingly affecting fiscal stability and economic security, and accumulating financial risks.

Last year, the Chinese authorities cited the Epidemic as the reason to raise the fiscal deficit rate from 2.8% to more than 3.6%, and the national government deficit will reach 3.76 trillion yuan in 2020.

Local governments have been allowed to have fiscal deficits since 2009, the year in which the national fiscal deficit scaled up from 180 billion yuan the previous year to 950 billion yuan until 2021, when it is set at 3.44 trillion yuan, an increase of 362%.

In addition to issuing general debt, local governments have been allowed to issue special bonds since 2015, issuing 974.4 billion yuan in that year, and then expanding year by year to 3.6 trillion yuan in 2020. This represents a 370% increase in just five years.

According to Reuters, Lou Jiwei questioned at a meeting of the China National Debt Association last December that “too much special debt is given …… where to find so many special debt special projects to go?” However, the two meetings in early March still prioritized 3.65 trillion yuan of special debt for 2021.

He also pointed out that during the 14th Five-Year Plan period, most provinces and municipalities are worried about debt sustainability, with rough calculations showing that about a quarter of provincial finances will need to spend more than 50% of their revenues on debt service.

According to statistics, local governments will have to spend RMB 982.9 billion on interest payments in 2020, an increase of 16.4% year-on-year.

If the above government debts are recorded in the financial books, if the 40 trillion yuan of “hidden debts” of local governments are included, the national government debt balance will suddenly increase to 86.55 trillion yuan by the end of 2020, and the debt ratio will rise to 85%, instead of the official 45.8%, far exceeding the international alert red line of 60%.