World News | As fiscal conditions tighten, Chinese local governments find it difficult to repay debts: report

Beijing [China]June 10 (ANI): China’s local governments are finding it difficult to repay debt raised through municipal and local government financing vehicle (LGFV) bonds due to slowing economic growth and falling revenue revenues amid a sluggish property market.

According to analysts at S&P Global Ratings, local government direct debt exceeds 120% of revenue in 2022.

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According to the International Monetary Fund, the explicit paper debt of local governments, including bonds, is $5.3 trillion. However, the total hidden debt, including LGFV debt, is about $15.3 trillion.

Nearly $2.1 trillion worth of municipal bonds, or 40% of outstanding debt, will mature over the next five years. As municipal bonds mature, debt burdens on bonds issued by LGFVs, which are off-balance-sheet vehicles, are getting heavier. Some $790 billion of LGFV onshore bonds are maturing this year, the highest level since 2021.

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A potential default on bond repayments could derail the country’s economic recovery and threaten its financial stability. Economists see China’s high level of municipal borrowing as the biggest financial risk this year. A recent last-minute bond payment by a local state-owned enterprise in Kunming, the capital of Yunnan province, suggests that the local government’s ability to service its debt is weakening.

So far, there have been no reports of LGFV defaults, but some have extended loan terms. However, any delay in payments by LGFVs increases the risk of possible bond defaults in the listed market.

China’s local governments are facing a vicious cycle of issuing more bonds to rollover maturities as they face a financial crunch from falling land sales revenue and stimulus to revive businesses. This could affect future investment in key sectors of the economy, ultimately weighing on growth.

Concerns are growing that local governments will cut spending on public services due to rising debt burdens and falling revenues. There are reports that many local governments, such as Hegang, Shangqiu, Wuhan, Guangzhou and Shanghai, are not paying teachers and government employees, rationing natural gas, restricting public bus services, auctioning off public schools, cutting pensions and health concerns benefits.

The population in the northern province of Hebei was left without natural gas for heating in November and December and was further affected by cuts in government subsidies. In January, homes in Hegang city, Heilongjiang province, also went without heat after local companies restricted supplies.

If local government debt problems become acute, it will affect banks and interest rates. According to the Center for Strategic and International Studies (CSIS), even a small default by LGFVs of Bank of China, the largest creditor of LGFVs, would lead to a large increase in non-performing assets.Some local governments are already pushing banks to extend deadlines and lower interest rates

Debt raised by local governments to push infrastructure projects toward central government goals, especially through local government financing vehicles, is now proving to be unsustainable. For example, Guiyang turned to the central government for help because of its inability to repay its debts. This suggests that a local government debt crisis is emerging in the coming months.

The situation is becoming increasingly difficult as local government finances are stretched as tight Covid-19 controls and a downturn in the property sector lead to fewer land sales. Local governments will have to cut spending or divert funds from infrastructure projects to continue paying down debt.

China’s efforts to revive the economy by increasing infrastructure investment will face headwinds due to the financial risks posed by large amounts of local government debt. Slowing growth in China will also make it difficult for revenues to keep pace with the rise in China’s total debt. China’s total debt has reached about $52 trillion, almost three times its GDP. Things could get worse, slowing the pace of China’s economic growth. (Arnie)

(This is an unedited and auto-generated story from a Syndicated News feed, the body of content may not have been modified or edited by LatestLY staff)