China’s Ministry of Finance has warned that the country’s local government debt ratio will approach an alarming level by the end of this year and may cross into the alarming range next year, meaning that the balance of local debt will exceed the fiscal revenue of the year.
Reuters reported that Xue Zhaoqian, deputy director of the Center for Government Debt Research and Evaluation at the Ministry of Finance, said at a seminar on “Sustainable Development of Government Debt in the New Landscape” held by the China National Debt Association on Dec. 8 that the balance of local government debt will reach 26 trillion yuan by the end of 2020 and the debt ratio will be close to the lower limit of the alert range. If debt issuance continues at this year’s scale, it may have to enter the alert zone next year.
According to Caixin, Chinese finance officials expect China’s local debt ratio (i.e., year-end debt balance/government revenue for the year x 100%) to be 82.9% in 2019, lower than the international alert range of 100% to 120%, but expected to be close to 100% in 2020, approaching the lower limit of the alert range.
A report released by rating firm Moody’s on Dec. 9 also gave a forecast that China’s local government debt ratio will reach about 97 percent in 2020.
Former finance minister speaks the truth: Some provinces’ debt ratios have exceeded the warning line
A number of former government officials and market participants who spoke at the conference called on local governments to reasonably determine the scale of their debt.
Liu Zhongguo, 86, a former minister of finance, said bluntly that some provinces’ debt ratios have greatly exceeded the alert line and regional risks have been exposed.
Zhang Hongli, a former vice minister of the Ministry of Finance, pointed out the root cause. He said that due to the slowdown in China’s economy in recent years, local government land revenue decline, directly affecting the government’s ability to repay debt, some regions in the west and northeast government debt balance to the ratio of fiscal revenue for the year more than two times, these provinces and cities are relatively lagging behind in economic development, comprehensive financial resources rely mainly on the central financial support, debt service funds from a single source, lack of sustainability.
The big issue of “special debt” Lou Jiwei criticism: where to find so many projects?
Reuters quoted China’s Standing Committee of the Chinese People’s Political Consultative Conference, the former Minister of Finance Lou Jiwei’s statement that the problem is “too much special debt, the general debt to too little. Special bonds are given too much, where to find so many special debt projects to go.”
Special bonds are also a kind of local government bonds, which are issued to raise funds for the construction of a special project.
In response to the epidemic rush level, the Chinese government arranged a central deficit of 2.78 trillion yuan in 2020 and issued 1 trillion yuan of special national bonds to fight the epidemic; the new local debt limit, the general debt limit of 980 billion yuan, the special debt limit is up to 3.75 trillion yuan.
Lou Jiwei suggested that future government debt issuance needs to be adjusted structurally. General local debt spending, if used properly, can improve the ability of effective infrastructure, promote economic development, and subsequent tax revenue will increase, thus enhancing the ability to repay debt.
Xue Geqian, on the other hand, frankly said that from the source of funds for debt service of special bonds, there are currently outstanding problems such as insufficient scale and single structure of debt service sources.
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