China’s Local Government Debt Hits Record High: Will It Lead to Default?

It was revealed that the scale of new debt taken out by Chinese local governments to repay maturing debt last year recorded the largest. Last year, local government debt increased by more than 10% compared to the previous year, and it is estimated that a huge amount of hidden debt is not caught in official statistics. Some are pointing out a high risk of defaulting without central government support.

The China Business News & Network reported on the 31st that the total amount of local government borrowing last year was 9.3394 trillion yuan, citing 2023 Local Bond Issuance and Debt statistics released by the Chinese Ministry of Finance the day before. This is an increase of 2 trillion yuan from the previous year, and the amount of refinancing issued for debt repayment, which exceeds 50% of the total, was 4.6803 trillion yuan. This is the highest level ever and more than the bonds issued for financial expansion or infrastructure construction (4.6591 trillion yuan).

The Chinese Ministry of Finance explained that the scale of refunding bonds last year was unusually large and that local government spending was much larger than revenue. This happened all at once when local governments could not recover their principal due to excessive investment in inefficient areas. Last year, the issuance of new local bonds decreased by 2% compared to the previous year, but the issuance of refinancing bonds surged by 79%.

Local governments issued many bonds for refinancing purposes, so the central government allowed some regions to issue 1.4 trillion yuan in special refinancing bonds. The provinces of Hunan, Anhui, Guizhou, Yunnan, Tianjin, and Guangxi Zhuang Autonomous Region had a large allocation of special refinancing bonds.

Local government debt was 40.74 trillion yuan. Although it is lower than the target limit of 42.17 trillion yuan set at the beginning of the year, the increase of 5.68 trillion yuan exceeded the target limit by 1 trillion yuan. It is pointed out that the direct cause is the problem of local government financing vehicle (LGFV) debt, which has surged to an unmanageable level. It is related to the central government taking measures such as issuing special bonds to solve the LGFV debt problem.

The Wall Street Journal (WSJ) estimated that “hidden debt” in China, including LGFV debt, which is not caught in official statistics, reaches $7 trillion to $11 trillion. In particular, it is evaluated that local governments have reached a level that their repayment ability cannot handle as they raise funds by issuing bonds using LGFV. In this situation, the Chinese Communist Party and the central government have ordered the ban of new projects such as local highways, private airport reconstruction and expansion, urban railways, and museum construction in high-debt risk areas such as Tianjin, Chongqing, Liaoning, Jilin, Heilongjiang, Guizhou, Yunnan, Gansu, Qinghai, Inner Mongolia, Ningxia, and Guangxi Zhuang Autonomous Region. It is known that special bond issuance will be allowed to local governments if necessary this year.