China’s local governments had 14.8 trillion yuan ($ 2.3 trillion) in hidden debt last year, and the number is likely to rise even higher this year, according to a research team. affiliated with the government.
Local governments are under pressure to increase infrastructure investment and spur growth through the pandemic, leading to a 6% increase in off-budget debt from the recent low of 13.9 billion yuan. in the third quarter of 2019, according to Liu Lei, a senior. Researcher at the National Institute of Finance and Development.
Hidden debt includes funds raised by government-related organizations for infrastructure and other public projects with a formal repayment guarantee. Bonds sold by local government funding vehicles, or LGFV, are a way for provincial governments to raise money to increase spending without including it on their official balance sheet.
China has announced that it will stabilize its macro leverage and reduce government debt this year to curb the risk. That could be difficult to achieve because budget spending cannot cover the investment needed to drive the economy’s targeted growth by 2035, says Liu, who holds an institution under the Academy of Social Sciences. China and government advisors, said.
“Local governments will seek to increase their contingent debt because they are under pressure to expand,” Liu said in an interview. “In the long term, the economy still faces many difficulties, including an uncertain external environment and an aging population.”
China does not have an official account of local government hidden debt, as it is technically a violation of the law. Estimates by different institutions can vary significantly. An estimate by S&P Global Ratings in 2019 put the size at 20 trillion yuan, while another estimate for the same year from the Rhodium Group stood at 41.2 trillion to 51.7 trillion yuan. yuan.
Liu’s calculations include bonds issued by LGFVs and borrowed from government-affiliated trust funds, insurance companies and other investment firms. It does not take into account bank loans to LGFVs, which can be used for commercial projects instead of public welfare projects.
According to Bloomberg calculations, local governments will have to repay a record-high 2.14 trillion yuan worth of LGFV bonds due this year.
He said contingent debt could lead to more than 700 billion yuan a year paying additional interest, as such loans are more expensive than government bonds. It also creates risks to the stability of the Chinese financial system, as all types of financial institutions – including banks, brokers and trusts – have bought debt, Liu added. .
Last year’s gains came after debt fell from a peak of 16.6 trillion yuan in 2016, when the authorities turned some of the loans into government bonds and converted them to the official balance sheet.