"Hidden debt" increased to more than half the size of the economy: China struggled to find a way out

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"Hidden debt" increased to more than half the size of the economy: China struggled to find a way out
December 27, 2021



Evergrande’s Ghost Cities

Goldman Sachs said in a note at the end of the month, total debt issued by LGFVs (still often referred to as hidden debt) in China had grown to about 53 trillion yuan ($8.3 trillion) at the end of last year. equivalent to about 52% of GDP and up from 16 trillion yuan in 2013.
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The lines between the anti-corruption campaign and the debt relief are increasingly blurred as Beijing tries to find ways to solve economic and political problems at various levels of local government. Since the beginning of the year, many provinces and cities across the country have announced their commitment to "radically tackle the problem of corruption that poses a debt risk to local governments."

In a report by the Jiangsu Disciplinary Supervision and Control Commission, one of China's richest provinces, released earlier this month, three former local officials were named as "examples". typical" about the corruption behind hidden local debts.

Qi Biao, a former deputy director of the province's Development and Reform Commission, was fired last December and expelled from the Party in June. Qi was found guilty of "abusing power and a position of power and influence." influence to mediate financial vehicles issued by local governments (LGFVs) who "received huge amounts of money by collecting intermediary fees" and "increased local government debts" direction."

The increased debts are not listed on local government balance sheets but are silently guaranteed to be repaid by the government. Therefore, compared to bonds issued by localities, debts raised through LGFV are easier to facilitate corruption cases.

Last year, a debt-related corruption case in Dusan county in Guizhou province, which has the highest debt ratio among provincial governments in China, attracted public attention. The county government recorded a total debt of 40 billion yuan ($6.27 billion) as of 2019, while annual tax revenue was less than 1 billion yuan.

The Central Commission for Discipline Inspection (CCDI), China's main anti-corruption body, blamed Pan Zhili, who served as leader from 2010 until he was fired in 2019. initiated various "image projects" with political, rather than purely economic, purposes.

Meanwhile, debt issued by LGFV - often referred to as "hidden debt", is one of the main targets of Beijing's debt reduction efforts. No official figures are available, but Lu Ting, chief China economist at Nomura, estimates that the country's hidden debt will reach 45 trillion yuan ($7 trillion) by the end of 2020, or 44 % GDP.

Furthermore, Goldman Sachs economists said in a month-end note, total debt issued by LGFVs in China rose to about 53 trillion yuan ($8.3 trillion) at the end of last year, equaling around 52% of GDP and up from 16 trillion yuan in 2013.

Meanwhile, the solvency of local governments is a long-term concern of Chinese policymakers. The Covid-19 pandemic has also made financial problems more difficult.

LGFVs are likely to play a big part next year in addressing local government "funding gaps," as land sales decline and infrastructure spending rises. although the speed may be moderate due to the strict implementation of the debt eradication campaign.

"The Chinese local government's measures will help alleviate some of the pressure on LGFVs from less financially viable provinces or regions," said Ivan Chung, deputy managing director at Moody's. However, it remains uncertain how long these LGFVs can maintain credit quality if they rely solely on government support to repay their loans without refinancing."

 

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