China’s debt-heavy local governments look for new ways to raise cash

BEIJING — Debt-heavy local governments in China need new ways to raise money under a central regime that’s made clear its priority is to reduce financial risks.

Local governments’ direct debt exceeded 120% of revenue in 2022, S&P Global Ratings analysts said, noting that’s more than what Beijing has unofficially said was an acceptable debt level.

“The country’s provinces and municipalities have relied heavily on expanded bond issuance to carry them through a COVID-triggered economic slowdown and collapsed land-sale revenues,” the S&P analysts said in a report last month.

International Monetary Fund data show China’s explicit local government debt nearly doubled over five years to the equivalent of $5.14 trillion — or 35.34 trillion yuan — last year. That doesn’t include several other categories of related, rapidly growing debt such as that of “local government financing vehicles” (LGFV) — which allowed regional authorities to tap bank loans for infrastructure projects.

China’s central government is paying attention.

In China’s annual government work report released this month, an entire section was dedicated to preventing and defusing major risks — primarily in real estate and local government debt. “We should … prevent a build-up of new debts while working to reduce existing ones,” the report said regarding local governments’ situation.

The topic didn’t get such prominence in last year’s report, pointed out Ting Lu, chief China economist at Nomura.

“Coupled with the conservative growth target [of around 5%], this may signal a potential shift in focus to tackling financial risks and hidden debt from local governments at some point this year, particularly in H2, after the economic recovery has largely stabilised,” Lu said.

Recent key speeches from Chinese President Xi Jinping have used similar language in calling on officials to address systemic risks. New Premier Li Qiang this month also named policies for “preventing and defusing risks” as one of the government’s near-term priorities.

Xi has also emphasized tackling corruption, an issue that has been prevalent in China — including at a local level.

Over the last three years, Covid and the real estate slump have cut into local government revenue, although it’s unclear exactly to what extent.

Official data provide some insight. The Ministry of Finance said the country’s spending on health climbed by nearly 18% last year to 2.25 trillion yuan, after barely growing in 2021.

A budget category called local government funds saw revenue from land sales drop by 23.3% to 6.69 trillion yuan — a loss of about $288 billion. S&P and other analysts estimate land sales account for about a quarter of local governments’ total revenue.

In China, land is owned by the government and sold to companies for development — usage agreements last for 70 years if the project is residential.

Property-related revenue will likely remain under stress as homebuyer sentiment has yet to fully recover, said Sherry Zhao, director of international public finance, Fitch Ratings.

She said local governments will likely turn to three other channels to boost revenue:

• Taxes — reduce the level of tax cuts announced during the pandemic
• Asset sales — generate mostly one-off income from the sale or rent of state-owned assets
• Transfers — draw more on central government funds

China’s central government increased its transfers to local governments by a whopping 17.1% in 2022, and plans to boost support by another 3.6% this year with 10.06 trillion yuan in transfers, according to the Ministry of Finance.

“Transfers to local governments accounted for about 60% of the increase in the central government deficit,” S&P analysts said in a separate report last week.

They don’t expect local governments to fall back on off-balance sheet debt. “Even in fiscally weak regions, it is unlikely that governments will resume the use of hidden debt financing, e.g. through local government financing vehicles (LGFVs),” S&P said.

“The long-term trend is clear: Beijing wants to ease the country off a reliance on investment-driven growth.”

But local governments still have bills and public services to pay for.

Historically, local governments were responsible for more than 85% of expenditure but only received about 60% of tax revenue, Rhodium Group said in 2021.

That’s according to lists of market access violations published in two reports in the last half year from China’s National Development and Reform Commission, which oversees economic planning.

The bike-sharing industry exploded in China several years ago, attracting a flood of companies from tiny players to giants such as Alibaba-backed Hello Bike and Mobike, acquired by Chinese food delivery giant Meituan.

Limited regulation often meant swaths of bikes crowded sidewalks.

Now, some local authorities are trying to restrict industry players to a handful of bike share quotas, sold for a multi-year period.

Among the cases the central government addressed, China’s NDRC economic planner said Zhangjiajie city sold a few five-year quotas for more than 45 million yuan ($6.6 million) — more than 10 times the starting price.

Most of the other cases mentioned did not list the total transaction amount.

Another bike-sharing quota auction in May last year reportedly raised 189 million yuan in Shijiazhuang, capital of Hebei province near Beijing. The city only disclosed the starting bids for what it called “public resources,” which totaled 17.3 million yuan.

Reports from the economic planner didn’t include the Shijiazhuang case, and the city did not respond to a request for comment.

While Alibaba-backed Hello Bike and local players won a bid, Meituan’s Mobike did not, according to a city release. The two companies did not respond to requests for comment.