Mass Debt Defaults by China’s Local Governments Are Inevitable: Experts

The city skyline in Shanghai, China, on Feb. 24, 2022. (Aly Song/Reuters)

China’s local governments are reporting worsening financial conditions. Their debt ratios have been increasing yearly, posing greater challenges in effectively managing financial risks.

China experts say that with 31 provincial-level governments across the country entering an irreversible and deep financial deterioration and the central government standing firm against bailouts, debt defaults are inevitable.

China’s Renmin University released a report on local financial condition earlier this year, saying that local governments are now facing unprecedented financial stress—the deterioration of the revenue structure in the past two years, uneven financial resources between regions, the expansion of rigid expenditure demand, the widened gap between fiscal expenditure and revenue, and the rapid increase in local borrowing to address the gap problem.

Local Governments Struggle to Pay Debts

Taiwanese media Central News Agency reported that, among the 35 major cities in China, only Hangzhou has a fiscal self-sufficiency rate exceeding 100 percent, while seven cities have a self-sufficiency rate of less than 50 percent.

Six cities have a shortfall of more than 100 billion yuan (about $14.28 billion). Chongqing’s deficit is 279.9 billion yuan (about $40.27 billion), Beijing’s is 129.2 billion yuan (about $18.59 billion), Tianjin’s is 122.8 billion yuan (about $17.67 billion), Guangzhou’s is 119.2 billion yuan (about $17.15 billion), Wuhan’s is 117.7 billion yuan (about $16.93 billion), and Shanghai’s is 105.6 billion yuan (about $15.19 billion).

Harbin, the capital of Heilongjiang Province, is faced with mounting debt. According to the 2022 Budget Execution and 2023 Draft Budget Report released by the municipal government, the city’s general public budget revenue last year was 26.22 billion yuan (about $3.77 billion), down 28.3 percent year-on-year, while the general public budget expenditures were 106.55 billion yuan (about $15.33 billion), up 7.4 percent year-on-year.

Adding bond interests and other expenditures, total expenditures reached 154.55 billion yuan (about $22.24 billion), resulting in a self-sufficiency rate as small as 29.22 percent.

As of the end of 2022, the city’s government debt balance was 289.86 billion yuan (about $41.71 billion), the report said.

Public data shows that Harbin has owed huge debts for several years. In 2019, before the COVID-19 pandemic, the city already had a government debt balance of 213.12 billion yuan (about $30.66 billion).

Tengchong city of Yunnan Province held a meeting on April 24 on finance and taxation. Ma Zixing, the city’s Communist Party boss, revealed that the city’s financial health is bad, and the municipal government can barely pay wages by solely relying on local financial resources.

“The city of Tengchong is in financial difficulties,” Ma said, pointing to the imbalance between income and expenditure, difficulty in securing revenues, low-quality revenues, low self-sufficiency rate, large amount of debt, decline in the government’s comprehensive financial strength, debt rate increasing year by year, and difficulty in risk prevention and management.

Chinese American current affairs commentator Dr. Jason said in his Chinese-language YouTube program that Beijing has been shifting funds from “surplus” regions to “insufficient” regions to cover the deficits and ensure a balanced budget across the country, thus creating total dependence on the central government.

The prerequisite for maintaining such a balance is to have enough “surplus” regions with more income than expenditures each year, he said. However, in the past two years, this balance has collapsed. The CCP has no way of solving the financial problems of China’s 31 provincial-level regions, he added.

People walk past a housing complex of Chinese property developer Evergrande in Kunming, in China's southwestern Yunnan Province, on Oct. 23, 2021. (Jade Gao/AFP via Getty Images)

Local Governments Ask Beijing for Help

On April 12, the Development Research Center of the Guizhou provincial government published an article on its official website, saying that the province’s debt problem is difficult to resolve on its own and that support from the central government is needed. This is the first time a provincial government openly asked Beijing for help to guarantee its financial stability, and between the lines, it threatened that, otherwise, local officials would “lie flat”—a new Chinese catchphrase that means “do-nothing”—and debt default will be inevitable.

On Dec. 30 last year, Zunyi Road and Bridge, the largest urban investment company in Zunyi city, Guizhou Province, suddenly announced that the company’s bank loan restructuring involved a debt size of 15.59 billion yuan (about $2.24 billion). The restructured bank loan would be extended to 20 years with an annual interest rate adjusted to 3–4.5 percent, with only interest payments, no principal repayment for the first 10 years, and principal repayment in installments over the next 10 years. This notice conveyed that the local government failed to repay its infrastructure loans.

Zunyi’s debt crisis is not an isolated case. According to incomplete statistics from Huaan Securities, as of the end of last year, 31 urban investment companies— in 12 provinces across the country—had overdue loans, arrears of interest, or extensions. Of these 31 companies, two had risky loans of more than 6 billion yuan (about $860 million), and six had risky loans of more than 2 billion yuan (about $290 million).

‘No Bailout’

Shortly after the Guizhou provincial government demanded help online, the Chinese Communist Party (CCP) leadership immediately asked Guizhou authorities to remove the article from the internet and, at the same time, made it clear that the central government had no money to bail out local governments.

On March 27, former Minister of Finance Lou Jiwei stated that Beijing would continue to adhere to the “no bailout” principle to deal with local government debts.

According to Guizhou’s 2022 budget implementation status, the provincial government’s debt balance was 1.24 trillion yuan (about $179 billion), and the province’s financial self-sufficiency rate was 24.2 percent.

By solely relying on its annual fiscal revenue, it would take Guizhou Province 6.6 years to pay off the principal amount of these debts, and about 25 years with the interest included. In addition, once the provincial government stops investing in fixed assets, the local economy, which lacks industrial support, would come to a standstill. If Beijing doesn’t step in to help resolve the situation, Guizhou’s massive debt can never be repaid.

Dr. Jason said there are two main reasons why the CCP’s Central Committee decided to do nothing about the local debt issue. One is that the central government itself is indeed out of money. The other reason is that the CCP knows there are regional debt crises like this everywhere. Once a precedent is set in one place, the whole country will immediately follow suit and claim that the local debt bubble will burst if Beijing doesn’t provide a financial bailout.

China expert Shi Shan told The Epoch Times on May 13 that the Guizhou government is now openly challenging the CCP. He said that while central authorities are firm with their “no bailout” stance, the situation will lead to discord between central and local governments. With the deterioration of local government finances and growing debts, he added that local authorities might break away from the CCP or even become confrontational, retaining or misappropriating public funds and doing things they didn’t dare do before.