ffrom several A few kilometers away, the China 117 Tower, the sixth tallest skyscraper in the world, is a remarkable sight – rivaling anything in Dubai, Hong Kong or New York. A closer inspection, however, reveals a dizzying scale of the building in Tianjin. The building, known locally as “117,” was never completed. Mostly unfinished; the tower’s concrete skeleton is partially exposed to the outside world. For years it has been repelling prosperity rather than being a magnet for business and wealth. Other disused tower blocks surround the building, forming a graveyard for the central business district. Local officials conceal entire areas if possible.
Stories of extravagance have circulated in China for years as cities and provinces piled up debt to build infrastructure and fuel the country’s economy. gross domestic product. These debts have reached extraordinary levels – the bills are now coming. Borrowing is usually located in local government financing instruments (LGFVs) Companies set up by officials circumvent rules that limit their ability to borrow. At the end of last year, the outstanding bonds of these entities reached 13.6 yuan ($2 trillion), accounting for about 40% of China’s corporate bond market. Lending through opaque, unofficial channels means that, in reality, the debt is much higher. Estimates for 2020 put the figure closer to $50trn.
Borrowing on this scale seems unsustainable, even in an era of rapid Chinese growth. But disastrous policymaking has pushed local governments to the brink of collapse, dimming China’s long-term growth prospects after a reopening frenzy. China’s zero-infection policy has hurt consumption, slashed factory output and forced provinces and cities to spend hundreds of billions of yuan on testing and quarantine facilities. Meanwhile, a housing crisis last year led to a 50 percent drop in land sales, on which local governments depend for revenue. While both problems are now easing – zero coronavirus abandonment, property rules have eased – a catastrophic chain of events may have set in motion. According to a recent survey, about a third of local authorities are struggling to repay their debts. The predicament threatens government services and has already sparked protests. A default could cause chaos in China’s bond market.
To stay afloat, local governments have moved into more costly and murkier corners of the market.more than half excellent LGFV Bonds are currently unrated, the highest percentage since 2013, according to Michael Chang CGS–row,broker.many LGFVs Can no longer issue bonds or refinance maturing bonds in China’s domestic market. For the first time in four years, bond spending exceeded new issuance in the last three months of 2022. To avoid default, many are now turning to informal sources of borrowing – often called “hidden debt” because it is difficult for auditors to work out how much is owed. These debts carry much higher interest rates and shorter repayment terms than the bond market. Other officials have moved offshore. LGFVA record $39.5 billion of dollar-denominated bonds were issued last year, many of which now pay coupons of more than 7%.
These higher interest rates have the hallmarks of a crisis. A report by Allen Feng and Logan Wright of research firm Rhodium estimated that 109 of the 319 local governments surveyed were struggling to make interest payments on their debt, let alone repay the principal. For this group of local authorities, interest accounts for at least 10 per cent of spending, a dangerously high level. In Tianjin, the figure is 30%. The city of 14 million on China’s booming east coast is a leading default candidate that has spooked markets. Although Tianjin is adjacent to Beijing, its financial situation is similar to places in the far western and southwestern provinces. At least 1.7 million people have left the city since 2019, an outflow comparable to that seen in rust belt provinces.The dismal land transfer income can only cover about 20% of the city’s short-term life LGFV debt.
Across China, the pressure on local budgets is starting to be felt. On February 23, a private bus company in Shangqiu City, Henan Province, said it would suspend services due to lack of government financial support. Several other people have said the same thing. Cuts to health benefits sparked protests in cities including Dalian and Wuhan, where they were met with large numbers of police officers. Local governments have struggled to pay private companies for covid-related costs such as testing equipment. In some places, they also failed to pay migrant workers, leading to more protests.
Some local governments have begun selling assets to avoid default. The recent relaxation of stock exchange rules may help localities raise funds from the public through listings. Governments could also start freezing assets in private transactions. It’s unclear, though, how far officials are willing to go, or who will buy the assets on offer. A new business district in Tianjin, for example, appears to have many signs of success — notably rows of gleaming new towers and a Porsche dealership across the street. But most of the shops on the ground floor of the project, which is jointly owned by a local government company and a private company, are empty. Local officials have begun auctioning off individual floors. One such sale recently closed without a buyer.
The central government is transferring funds to local governments on an unprecedented scale. According to Mr. Feng and Mr. Wright, more than RMB 30 was provided between 2020 and 2022.one LGFV The city of Zunyi, in the heavily indebted southwestern province of Guizhou, recently struck a deal with local banks to lower interest rates, defer principal payments by 10 years and extend debt maturities to 20 years. Such arrangements may become more common in the future. Proponents argue that it shows local officials are genuinely willing to repay the debt, acknowledging that it will take more time than expected.
But Jack Yuan of ratings agency Moody’s says growing debt over the past decade suggests many projects will never truly turn a profit.annoying LGFV Taking Zunyi as an example, since 2016, the cash flow has been negative, and it seems that there is little hope of turning losses into profits.As analysts at Rhodium Consulting asked, if these governments cannot pay locally gross domestic product Growth rates are high, often over 7%, how are they going to achieve 3% growth in the coming decade? ■
For more expert analysis of breaking economic, financial and market news, sign up for Money Talks, our subscriber-only weekly newsletter.