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Free AccessMNI: Tackling Local Debt In China’s Rustbelt Is A Long Haul
A bond restructuring by Hegang in northeast China may prefigure similar belt-tightening exercises in other overly indebted cities dependent on declining heavy industries as the central government eschews bailouts, policy advisors told MNI.
The provincial government of Heilongjiang transferred about CNY10.47 billion to the city of about one million people in 2020 and is helping to meet principal and interest payments on its debts, after its revenue-spending gap widened to about CNY11.38 billion in 2020 as its once dominant coal industry continued its decline and the property market slumped.
Provincial money is also contributing to daily operations and paying salaries, said Ji Fuxing, head of China government debt research at the National Institution for Finance & Development.
But, while Heilongjiang still depends on transfers from the central government, with its general budget revenue only 26.8% of general budget expenditure in H1 2021, ranking it fourth from the bottom among thirty-one provinces, according to Yuekai Securities, Beijing provided no direct help to resolve the problems in Hegang. The city officially owed CNY13.11 billion by the end of 2020, including CNY11 billion of general bonds and CNY2 billion of special bonds.
“The central government has no obligation to bail out any local debt risk, and it is the provincial government’s responsibility to resolve the risk,” Ji told MNI.
RULES IN PLACE
While Hegang had not breached rules capping expenditures on general bond interest at 10% of its budget or interest on special-purpose bonds at 10% of its government-managed funds, officials still moved to increase revenues, cut spending, and sell assets to bolster its debt repayment capacity, Ji noted.
At the end of December, Hegang cancelled plans to hire lower-level government workers as “a fiscal restructuring plan brought significant changes to the city’s fiscal strength,” a notice put on the city website and later removed said.
Hegang is unlikely to be the last city requiring help from higher-level government to service liabilities. More than half of China’s cities had revenues of less than 50% of spending in H1 2021, according to Yuekai Securities. Also, sixty-nine cities dependent on highly concentrated industries are officially recognised as “resource-depleted,” and their repayment risks are rising as land sales decline and real estate markets cool, said Yang Xiaoyi, a researcher at BRI Data.
Ji also expects greater regional repayment problems but said debt risks nationwide are controllable. The central government has set up indicators to monitor local debt risks, including calculations of off-balance sheet liabilities, he noted. The Ministry of Finance earlier this year colour-coded local governments by debt risk -- red, orange, yellow and green -- though it keeps the list secret.
Restructuring cities cannot issue new debt to expand investment for three-to-five years, and must prioritise maturing bond repayments, including for some off-balance sheet debt, said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department.
FISCAL, MONETARY SUPPORT
While China’s fiscal and monetary authorities are set to provide some support this year for the transformation of rustbelt industries, Beijing will not significantly increase transfers to local governments, which are going to have to tighten their belts, Ji said. Total public debt issuance, including central and local governments, should come in about CNY7 trillion in 2022, helping to stabilise growth, he said.
“Even with increased downward pressure, the central government should not significantly elevate the debt-to-GDP ratio, as it needs to prepare for the gap in social security funds as well as uncertainty in the longer run,” Ji added.
Despite their difficulties, some distressed local governments may continue to look to new projects to justify more debt issuance or turn to greater tax collection enforcement and even fines to boost revenues, Yang said.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.