China said local government debt is manageable and authorities have enough financial resources to avoid risks from spreading, seeking to allay investor fears of possible defaults.
The official Xinhua News agency published a report Monday responding to recent concerns about local government finances. It quoted an unidentified official from the Ministry of Finance as saying government finances are generally healthy and urged local authorities to tackle their debts.
The current challenge is that “the distribution of local government debt is unbalanced, with some regions exposed to relatively high risks and under rather big principal and interest payment pressure,” the official said in the Xinhua report.
Beijing has urged local authorities to “hold on to the bottom line that no systemic risk will occur,” the official said.
China’s ballooning levels of municipal borrowing was the number one financial risk this year for investors across Asia, according to a recent Bloomberg survey. Many local authorities are facing severe fiscal stress after revenue from land sales — a major source of government income — plummeted amid a downturn in the property market. That’s reduced their ability to ramp up support for the economy at a time when the recovery is weakening.
Goldman Sachs Group Inc. estimates that government debt — including from off balance-sheet sources — stood at 156 trillion yuan ($22 trillion), or 126% of gross domestic product last year. Research from Rhodium Group shows half of cities in China experienced difficulty in managing interest payments on their debt.
Attention is particularly high over so-called hidden debt, the off balance-sheet borrowing raised by financing vehicles on behalf of local governments. Several regions, such as the southwestern city of Guiyang and Hohhot in the north, have acknowledged it’s extremely difficult for them to handle the debt problem on their own. A local government financing vehicle, or LGFV, linked to Kunming city last month narrowly avoided a bond default.
Wang Tao, chief China economist at UBS Group AG, said it would be “unrealistic” to expect the central government to step in and bail out local governments because of concerns over moral hazard — a situaion where a bailout encourages businesses or local governments to take on more risky debt.
China will probably rely on banks to restructure the debt and push local authorities to sell assets other than land, such as state-owned enterprise shares, she said. Defaults would likely be avoided at the expense of banks’ profit margins.
In the long run, “there will be a smaller role played by government, especially local governments, in the overall economy” as there will be less revenue from land and therefore less financial resources to invest in infrastructure, Wang said. It would be very difficult to increase taxes “in a significant way that will offset the land sales,” she said.
(Updates with comment from economist.)
