The move here is to largely deal with “hidden debt” or what is intricately known as debt arising from local government financing vehicles (LGFV). These are off-balance sheet debt that are incurred by local governments to finance big projects and infrastructure. For some context, local governments in the past were not allowed to sell bonds and so resorted to establishing LGFVs to raise funds.
*coughs* And surprise, surprise. That didn’t turn out too well. As of last year, IMF estimated China’s “hidden debt” to be around above ¥60 trillion. That translates to roughly half of the country’s GDP. Danger, danger.
And with China’s property sector imploding in recent years, that has impacted revenues of local governments and in turn raises the odds of these LGFVs going bust. So, that brings us to where we are now.
Chinese lawmakers are now said to be considering a bill to raise ceilings on local government debt and this will effectively be a one-off measure to replace these supposed “hidden debt”. The Chinese ministry of finance has had many plans since 2015 to try and address this and this is just another part of that.
Just be wary though that this is a sort of left pocket to right pocket situation. What this effectively does is move the supposed “hidden debt” back on to the balance sheets of local governments. It still does not completely address the fiscal sustainability of it all and the structural risks in servicing the debt.
But I would assume as part of this measure, China will also announce some plan to allow local governments to issue a sizable amount of bonds through the next three to four years to deal with all of this.
Otherwise, it’s not exactly a full proof plan and that will not ease investor concern and trust in Beijing’s handling of this matter. That especially with Xi having pinning this item as one of China’s three “major economic and financial risks” – alongside the property market and financial sector concerns.