China’s $2.3 trillion hidden debt could climb even further

China’s local governments had 14.8 trillion yuan ($2.3 trillion) of hidden debt last year, and the figure could climb even further this year, according to a government-linked think tank.
Local governments were under pressure to increase infrastructure investment and shore up growth through the pandemic, leading to a 6% rise in off-budget borrowing from a recent low of 13.9 billion yuan in the third quarter of 2019, according to Liu Lei, a senior researcher at the National Institution for Finance and Development.
The hidden debt is comprised of funds raised by government-related entities for infrastructure and other public projects that carry an implicit official guarantee of repayment. Bonds sold by local government financing vehicles, or LGFVs, are one way provincial authorities raise money to increase spending without including it on their official balance sheets.
China has vowed to stabilize its macro leverage ratio and lower the government debt ratio this year to rein in risks. That could be hard to achieve as on-budget spending can’t cover the investment needed to drive the economy’s targeted growth by 2035, said Liu, whose organization is under the influential state-run Chinese Academy of Social Sciences and advises the government.
“Local governments will find ways to increase hidden debt because they are under pressure to expand investment,” Liu said in an interview. “In the longer term, the economy still faces lots of headwinds, including an uncertain external environment and an aging population.”
China doesn’t have an official account of local governments’ hidden debt, as it’s technically against the law. Estimates by different institutions could vary significantly. One estimate by S&P Global Ratings in 2019 put the size at 20 trillion yuan, while another that same year from Rhodium Group put it at 41.2 trillion to 51.7 trillion yuan.
Liu’s calculation includes bonds issued by LGFVs and borrowing by government-linked trust funds, insurers and other investment firms. It doesn’t take into account bank loans to LGFVs, which may be used on commercial projects instead of public welfare projects.
Local government will have to repay a record high 2.14 trillion yuan worth of LGFV bonds maturing this year, Bloomberg calculations show.
The hidden debt could have led to more than 700 billion yuan a year in extra interest payments, as such borrowing is more costly to service than government bonds, he said. It also creates risks to the stability of China’s financial system, as all kinds of financial institutions – including banks, brokerages and trust funds – have bought the debt, Liu added.
Last year’s increase came after debt declined from a peak of 16.6 trillion yuan in 2016, as authorities transformed some of the borrowing into government bonds and moved them onto official balance sheets. MDT/Bloomberg