Beijing has ordered all levels of government across China to lower their debt levels, as leaders move to address the fiscal risks that arose last year when policymakers boosted spending and cut taxes to fight the economic fallout from the coronavirus pandemic.
In its work report presented to the National People’s Congress on March 5, Beijing said it would strive for “basic stability” in the macroeconomic leverage ratio of debt to gross domestic product (GDP). But at Monday’s meeting of the State Council, the government cabinet explicitly called for a reduction in the government’s debt level.
The announcement underscores Beijing’s commitment to its renewed deleveraging campaign to reduce debt and financial risks, which the work report cited as one of the government’s five major tasks for this year. It also further differentiates Chinese economic policy from that of the United States, with Beijing pushing to reduce economic stimulus while Washington ramps up economic support and takes on massive amounts of new debt.
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The State Council’s announcement suggests it will focus on tackling the growing implicit debt piles owned by local governments, and on reducing local governments’ decades-old reliance on debt-driven growth, posing a new test to local financing vehicles and state-owned enterprises, analysts said.
“Governments at all levels must tighten their belts,” the State Council statement says. “We must solve the potential risks and consolidate the economic recovery.”
China’s overall leverage ratio jumped by 24.7 percentage points last year to 270.1 per cent of GDP because of growing indebtedness by businesses and households amid weak economic growth and a sharp rise in government spending on economic stimulus, according to the National Institution for Finance and Development (NIFD), a Beijing-based governmental think tank.
China’s overall government debt does not appear to be as big of a concern, as its ratio expanded 7.3 percentage points to 45.6 per cent of GDP, while the central government’s debt ratio stands at 20 per cent and that of local governments is 25.6 per cent.
A separate estimate by the Bank for International Settlements, the association of global central banks, put the Chinese government’s overall leverage at 60.9 per cent at the end of September – far lower than 128.7 per cent in the US and an average of 107.4 per cent for G20 nations.
“Explicit government leverage is certain to rise this year,” said Liu Lei, a senior NIFD researcher who calculated the group’s leverage ratio estimates. “The government may turn its attention to local government implicit debt, but this remains hard to address.”
In 2018, the Finance Ministry conducted a major investigation into local government’s implicit debt – loan guarantees and other commitments that are not part of their budgets – and ordered local authorities not to increase them further. An official estimate of the size of these implicit debts has never been published, but market guesses run well into the trillions of yuan.
On Tuesday, Tianfeng Securities estimated in a note that the size of local government implicit debt could be more than 40 trillion yuan (US$6.15 trillion).
Beijing began a deleveraging programme three years ago, only to see its efforts impeded by the trade war with the US and then the coronavirus pandemic. But unlike the across-the-board deleveraging in 2018 that focused on so-called shadow banking – widespread unregulated lending by non-banking institutions – the current deleveraging effort must address the thousands of financing vehicles that borrowed on behalf of local governments and which are a major source of implicit government liabilities.
Such vehicles sold 4.49 trillion yuan worth of bonds last year, an increase of 28 per cent from 2019, according to data from China Chengxin International Credit Rating.
Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, said that relying on fiscal spending to solve many of China’s economic problems has increased overall debt risks.
The economic recovery and risk prevention are intertwined in a very complicated equation. It’s not a simple maths question
Liu Shangxi, Chinese Academy of Fiscal Sciences
“Firefighting is certainly a public obligation, but how can you do it if the firefighters get sacrificed first,” Liu asked during an online seminar hosted by the academy on Friday.
He stressed the need for better coordination between fiscal and monetary policymakers, saying that the interest levels on existing government debt are “pretty high”.
“The economic recovery and risk prevention are intertwined in a very complicated equation,” he said. “It’s not a simple maths question.”
Speaking at a lecture hosted by the Shanghai Pushan Foundation last week, Zhang Xiaojing, director of the institute of finance at the Chinese Academy of Social Sciences, called on local governments to sell some of their assets to reduce their debt mountain.
The National People’s Congress has already suggested that Beijing compile a composite list of local balance sheets detailing local assets and liabilities, in preparation for the government’s debt-reduction campaign.
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