In response to the epidemic, China has expanded the scale of debt issuance, but it has also led to high debt risk for local governments. According to statistics, only 8 out of 31 provinces in mainland China have a fiscal balance of more than 50%, and China’s major economic provinces of Jiangsu, Shandong and Guangdong are also the provinces with the most local debt.
WeChat’s Urban Evolution reports that the China Association of State Bonds and China Chengxin International Credit Rating Co. have jointly compiled and released the “China Local Government Bond Development Report (2021)”, which analyzes local government debt in 31 provinces as of June 2020.
The data shows that by the end of 2020, the balance of local government debt is RMB 25.66 trillion (about NTD 110 trillion), and the debt ratio is nearly 4 percentage points higher than in 2019.
According to the report, as of June last year, among China’s 31 provinces, Jiangsu, Shandong and Guangdong, the top 3 economic provinces in terms of gross production (GDP) perennially, are also the provinces with the largest stock of local debt.
From January to June 2020, the scale of debt issuance in Jiangsu reached 245.871 billion yuan, which is close to the annual level of 2019; Guangdong is more than the annual scale of debt issuance of 281.210 billion yuan in 2019, and more than Shandong and Jiangsu, located in the first place in the country.
In the economic ranking of the provinces, the speed of debt issuance is also significantly accelerated. For example, the scale of debt issuance in Yunnan reached 137.667 billion yuan in the same period, growing more than 1 times; Fujian, Inner Mongolia, Jilin and Tibet also grew at a rate of more than 50%.
If we look at the local special debt, which generally accounts for more than 60% of local debt in each province, the focus of different provinces is obviously different.
Guangdong’s debt issuance scale is not only the first place, and almost reached the second place of Yunnan twice. Among the new special debt in Guangdong, transportation infrastructure accounts for 37.90%, followed by ecological and environmental protection projects, accounting for 31.13%.
Jiangsu’s special debt is focused on ecological and environmental protection, with municipal and industrial park infrastructure, transportation infrastructure and ecological and environmental protection projects ranking in the top three, respectively. Shandong Province’s special debt issue on information infrastructure was 66.8 billion yuan, the highest in the country in such areas, followed by Sichuan and Chongqing.
The growth of local debt, while expected to further promote investment expansion, on the other hand, there is the potential to increase the risk of urban debt.
A resolution approved by China’s National People’s Congress (NPC) previously set the overall risk alert for local government debt at no more than 100%, meaning that the maximum local debt balance should not exceed the level of comprehensive local financial resources.
However, nine provinces have exceeded the 100% threshold. After Guizhou and Inner Mongolia, which are perennially in the top 2 debt ratios, are Liaoning, Ningxia, Tianjin, Qinghai, Yunnan, Jilin and Hunan, all of which are located in the northeast and western regions, except Tianjin and Hunan.
The fiscal balance ratio (general public budget revenue/general public budget expenditure) of these 9 provinces is generally below 50%, and Qinghai is even less than 20%.
However, even among the provinces that temporarily did not exceed the alert line, most of them had fiscal balance ratios of less than 50%. In fact, only eight provinces in mainland China have a fiscal balance ratio of more than 50%.
In 2019, China’s Ministry of Finance had announced the fiscal difficulty coefficients of 36 provinces (autonomous regions, municipalities directly under the central government, and cities listed in the plan). Among them, 27 places had a fiscal difficulty index of more than 50%, which also included the major economic provinces of Guangdong and Shandong.
Li Yang, director of China’s National Finance and Development Laboratory, was quoted as saying that local governments cannot rely on their own revenues to balance their own expenditures, which is a dangerous fiscal phenomenon. Although the growth rate of the debt rate in each province is likely to slow down in 2021, the continued growth of the debt rate is still a concern.
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