2024-04-16 00:33:01
To the crisis that China‘s real estate sector is going through, we must add another one that goes more unnoticed: the mountain of hidden debt that the city councils and local entities of the Asian giant have. Specifically, some estimates raise it to more than 70 trillion yuan (9 trillion euros). This is more than double Germany’s GDP.
The central government approved a series of measures in the second half of 2023 to help these local governments exchange or restructure their large unrecorded liabilities. All this in an attempt to control the risk of the acquired debt.
Local government financing vehicles (LGFVs), state-owned companies set up to borrow on behalf of local authorities, are responsible for the largest burden of hidden debt on councils. Generally broken model of China revives the ghosts of the crisis in Japan and the real estate bubble in Spain” href=” target=”_blank” rel=”noopener”>this type of debt is contracted to invest in public projects such as roads and bridges.
Experts assure that the measures are poorly suited to the real problem represented by the hidden debt of these administrations. They reiterate that, at most, they will “provide temporary relief” and reiterate that this is already “an imminent liquidity crisis problem for Chinese regional authorities.”
Beijing has been trying to solve this problem for years, assigning quotas for municipalities to incorporate their hidden debt into their official budgets. Yes ok Previous plans to solve the hidden debt problem had a gradual approachthe most recent measures taken by the central government, in July, led cities and provinces to issue one trillion yuan in “special refinancing bonds” to pay off part of their unregistered debt.
These unrecorded liabilities, which include LGFV bonds with implicit official backing, have accumulated over the years to reach between 30 and 70 trillion yuan, according to some estimates, and become a threat to fiscal and fiscal stability and sustainability. financial of the country.
Qiao Baoyun, director of the Chinese Academy of Public Finance and Public Policy at the Central University of Finance and Economics, said the root of local governments’ debt problem is “the lack of controls on how they spend their money.” That is to say, they have been given too much leeway to spend and go into debt.
Overall, despite these issuances, progress on debt resolution was slow amid uncertainty over the viability of many local government financing vehicles and concerns among banks that this massive amount of liabilities would overwhelm the accounts. Since it will be debt that may not be repaid, increasing the delinquency of the entities and causing them to be unable to meet the regulatory objectives set by the authorities.
Although banks have been asked to extend loan terms and reduce the interest rates they charge LGFVs, many are cautious about issuing new loans given their strict requirements regarding to the cash flow of the projects and the underlying assets. This has increased financial pressure on many LGFVs and may force them and their local authorities to seek new and less conventional funding channels to repay outstanding debt and interest.
From October to December, almost all regions in China issued these special refinancing bonds, raising nearly 1.4 trillion yuan to pay off hidden loans, according to calculations by analysts at Tianfeng Securities. The regions include heavily indebted Guizhou province, which topped the list with issuance of 226.4 billion yuan.