Clearly President Xi Jinping’s call to reduce debt has few takers amongst the local governments. For some of them, in fact, the addiction to debt has proved difficult to kick. And rating agency, S&P, says China will see first bond default by local governments in 2018.
Leiyang, a coal-rich city of more than a million people in central China, has failed to pay its civil servants last month (May 2018) “after a significant dive” in its revenues amidst reports that Chinese local governments’ have concealed a debt of whopping US$2.4 billion.
It is not the only city to show signs of financial stress amid President Xi Jinping’s ongoing supply-side reforms. Workers on the government payroll in the Hunan province city have not got their wages for the month of April even at the start of June. Generally salaries are paid by the 15th. The April salaries were finally cleared on the 8th of June, South China Morning Post (SCMP) reports.
Leiyang’s finance bureau, in a communication early this week attributed its financial woes to a “serious shortage” of cash reserves, and to “worsening” fiscal deficit.
Other city governments are faring no better, going by media dispatches. “Local governments across China are under growing pressure to generate enough revenues to cover their expenditure, as Beijing continues to chip away at income sources such as fees and taxes, and tightens the screws on polluting industries such as coal and steel”, Sidney Leng said in a dispatch to SCMP.
Three months ago, in March, rating agency, Standard and Poor’s (S&P’s) sounded a word of caution on local governments’ finances. It said local government financial gaps could expand from 8.7 per cent of China’s GDP in 2017 to 11 per cent this year; this is because their revenues are squeezed by cuts to taxes and fees and Beijing’s push for growth through public investment.
President Xi Jinping introduced in 2015 supply-side structural reforms to deleverage the economy and cut excess capacity.
About Leiyang’s fiscal woes, the Post-dispatch said:
“While the provincial economy grew by 8 per cent last year – faster than the national average – Leiyang’s once lucrative coal industry has been shrinking since 2012. That has reduced administrative fees paid to the government by 1 billion yuan (US$156.4 million) – almost half the city’s total annual revenues in 2017 – in the past five years.
The city’s revenues plunged by more than 18 per cent last year from 2016 to about 2.2 billion yuan. Its revenues for the year to May, about 800 million yuan, are already down 15 per cent from the same period a year ago.
Across the province, profits were slashed by more than 70 per cent at major coal-fired electricity companies last year because of high coal prices after the authorities took measures to reduce overcapacity and cracked down on enforcement of environmental regulations”.
Two months ago, in April, audit reports exposed a harsh reality of the Chinese financial system.
Local governments have accumulated more than 15 billion yuan (US$2.4 billion) of undeclared debt while working around the rules to fund infrastructure projects, auditors found. Baotou (largest city in Inner Mongolia), Shaoyang (in Hunan province), Xixia in Yinchuan (capital of Ningxia Hui autonomous region) are amongst the provinces ticked off by the National Audit Office in its fourth quarter report.
Clearly President Xi Jinping’s call to reduce debt has few takers amongst the local governments. For some of them, in fact, the addiction to debt has proved difficult to kick, going by a Hong Kong daily’s observation on the state of world’s second- biggest economy.
Companies known as local government financing vehicles (LGFVs), have been floated across China to fund projects. The local governments guarantee their borrowing through bonds often by informal arrangements. This borrowing practice highlights China’s daunting financial risks.
For instance, the city government of Shaoyang has borrowed 7.2 billion yuan (US$1.1 billion) through its LGFV by using public infrastructure such as roads as collateral to pay for old debt and to fund other infrastructure construction. This is a forbidden practice though.
According to the National Institution for Finance and Development, a think-tank, public-private partnerships have become the mainstay of cover-up ops to hide mounting debt. Old liabilities are being rolled over with new borrowings.
During the first quarter of this year, local governments borrowed a total of 219.5 billion yuan (US$35 billion) in bonds, all of which was used to roll over old debts.
Authorities in Hunan and Ningxia have manipulated their books to inflate their revenues by 550 million yuan (US$88 million) last November and this March respectively.
The audit has also ‘named and shamed’ the Agricultural Development Bank of China, a policy bank, for excluding from its NPAs loans worth 3.3 billion yuan (US$530 million).
No surprise, rating agency, S&P, says China will see first bond default by local governments in 2018.
– by malladi rama rao