21 January 2019

Infrastructure sector to feel the pain from local deleveraging

China’s top audit body unveiled on Monday a long-awaited report on local government debts, which showed the liabilities at 17.9 trillion yuan (US$2.95 trillion) as of the end of June last year. The figure, which was up nearly 67 percent from the 2010 level, will prompt fresh deleveraging calls to reduce systemic risk. The deleveraging, however, will be a painful process and may hurt some sectors, particularly infrastructure, columnist Guo Cheng wrote in the Hong Kong Economic Journal.

The debt problem in China has been building up since 2011. To contain the risk, authorities have requested banks to strictly control lending to local government financing vehicles.

But against the backdrop of a weak global economy in recent years and still underdeveloped domestic consumption, local governments sought to sustain regional growth through massive investments, leading to continued heavy borrowing.

According to the National Audit Office (NAO), the total debt of local governments was at 10.7 trillion yuan in 2010. Of that, 4.46 trillion yuan or 41.6 percent of the debt was due for repayment in 2011 and 2012.

The fact that local government debt balance has risen since then, instead of declining, suggests that many local governments simply secured new loans to repay maturing ones.

Moreover, Guo noted that a power shuffle in 2013 was also a factor why local governments had made little progress in cutting their debt.

Numerous officials pushed up the borrowing levels recklessly, thinking the problem would no longer be theirs as they would be leaving their posts and handing over charge to others.

Guo believes this problem will be soothed as the central government has announced that even former staff will be held accountable for any unreasonable debt activities.

If we look into the NAO report, we find that nearly 60 percent of the funds borrowed went to finance municipal construction projects and transportation systems, Guo pointed out.

Transportation investments can generate return but it is almost impossible to get direct financial reward from things such as new municipal offices.

Municipal construction spending accounted for 34.64 percent of usage of local government borrowing, the largest among all categories. To bring down the debt, local governments have to rein in such spending.

Deleveraging is a painful process, Guo noted. Tax reforms can help restore the health of local public finances but what will help more to deflate the governments’ debt in the future will be trimming the infrastructure spending. That explains the cautious outlook on the sector.

– Contact the writer at [email protected]


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