According to Bloomberg, there are growing signs that China’s local authorities are facing worrying debt burdens.
Thirty-one provincial authorities in China now have outstanding debts close to the risk threshold of 120% of income from its Ministry of Finance. Those crossing that debt level will face more borrowing restrictions, limiting potential economic growth.
Over the next five years, local authorities will face intense maturity pressure as the maturity of bonds worth almost $2.1 trillion (15 trillion yuan) come due. This amount represents 40% of their outstanding debts.
Due to the ongoing property crisis, revenue from land sales sharply declined, affecting their ability to repay debts. As a result, they need to issue more bonds to repay due debts instead of financing investments, boosting growth.
In China, land sales refer to the lease of land-use rights by local authorities to companies for a number of years. In 2021, land sales accounted for nearly 42% of their revenue.
According to a recent report from China Business News, many provinces and cities reported lower-than-expected fiscal revenue due to the economic downturn, the impact of the COVID pandemic, and the property market collapse.
Last month, Reuters reported that the fiscal deficit of 31 provincial-level administrative regions in China reached nearly $950 billion (6.74 trillion yuan) in the first eight months of this year.
One of the factors contributing to the deficit is that local provinces and cities must spend vast sums of money on COVID testing and quarantine measures under the Chinese Communist Party’s (CCP’s) instructions.
Bloomberg reported that special bonds account for the fastest-growing portion of local authorities’ debt pool. These funds are primarily used to finance local infrastructure investment to boost economic growth.
About $1.5 trillion of new special bonds have been issued since 2020 as local authorities were first allowed to issue their bonds, double the amount issued in the five years from 2015.
As about $510 billion of bonds will be maturing in 2023, a record high for any single year, local CCP administrations will find next year challenging.