The Chinese central government has ordered local governments to thoroughly investigate and curb their “hidden debt” levels as part of ongoing efforts to deleverage the economy and stymie systemic financial risk.
The South China Morning Post reports that Beijing issued a directive to municipal governments on the matter, prompting Hunan province governor Xu Dazhe to order officials to “follow requests from the central leadership to get a clear picture of hidden local government debt as soon as possible and then make plans to address it.”
Similar reports have emerged from the inland Chinese provinces of Gansu and Hubei.
Li Yuze, fixed-income analyst at China Merchant Securities, said that while the official figure for China’s nation-wide government debt to GDP ratio is 36.7%, it could actually be well over the risk threshold of 60% set by the Bank for International Settlements if “implicit” debt is included.
“Implicit” local government debt encompasses credit guarantees for borrowing by the financing vehicles of local governments, as well as the debt of local state-owned enterprises and public-private investment projects.
Chinese legislator Yin Zhongqing has said that the implicit debt of local government could be as high as 20 trillion yuan (approx. USD$2.9 trillion), as compared to explicit debt of around 16.8 trillion yuan as of the end of June.
In order to offset curbs on hidden debt growth as well as bring greater transparency to finances, Beijing is pushing for local government to switch to bond issuance in order to fund their expenditures.
Beijing recently called for an acceleration of special bond issuance before the end of 2018 to fund infrastructure spending, after putting curbs on the financing of local governments by state-owned enterprises in April.
“Speeding up the issuance of special bonds is a way to open wider the front door to financing,” said Zhao Quanhou, senior researcher with the Chinese Academy of Fiscal Sciences under the Ministry of Finance.
Beijing could also permit improvident local governments to default or even go bankrupt in order to forestall moral hazard, as recommended by a Chinese central bank official towards the end of last year.
“We could see the first debt default of a local financing vehicle in coming months,” said Larry Hu, chief China economist at Macquarie Capital in Hong Kong.