China’s local authorities sped up issuing Local Government Bonds (LGBs) on a large scale, with the total amount climbing to trillions of yuan (billions of U.S. dollars) as of September.
The issuance of LGBs soared to 6.08 trillion yuan (about $1.1 trillion) from January to August, surging by 24 percent year-on-year. Among them, a newly added local bond grew by 62.4 percent, totaling 4.021 billion yuan (about $581 million), as reported by official media Securities Daily on Sept.2.
The trend is accelerating, as 43.1 billion yuan ($6.1 billion) in LGBs were issued from Aug. 29 to Sept. 2, and 56.9 billion yuan (about $8.1 billion) in the following week, according to Wind, a provider of financial data services, and cited by state-backed 21 Jingji.
In China, LGBs can be described as: by purpose, newly added, and refinanced. Refinanced bonds refer to funds raised to repay the principal of maturing LGBs.
The first eight months of this year saw newly added bonds issued for 4.2 trillion yuan (about $604 billion)—that was beyond expectations, an investment consultant said in the Securities Daily report.
In addition, subsequent refinancing bond issuance is expected to significantly surpass last year, said Fen Lin, a senior analyst of Beijing-based Golden Credit Rating, citing that the maturity of local bonds between September and December would be approximately 1.04 trillion yuan (about $197 billion), a 174 percent hike from 602.8 billion yuan (about $87 billion) in the same period in 2021.
Local Financial Governments Unable to Settle Budget
In recent years, China has generally demonstrated a downward trend in the local financial self-sufficiency indicators, according to the Chinese financial portal Yicai on June 16.
The financial self-sufficiency ratio for the local budget, or the proportion of general public budget revenue to total expenditures for local governments, is one of the indicators of local financial sustainability.
In terms of the local public budget, it is estimated that in 2022 general expenditure will surge to 11.526 trillion yuan (about $1.7 trillion) and revenue to 23.1 trillion yuan (about $3.31 trillion). Putting the ratio of local financial self-sufficiency to just under 50 percent, the report said.
In economically advanced regions such as Shanghai, Beijing, Tianjin, and provinces like Guangdong, Zhejiang, Jiangsu, Fujian, and Shandong, financial self-sufficiency rates are 60 percent or higher. At least 22 provinces see rates lower than 50 percent, and 11 provinces below 40 percent.
This gap exists in prefectural and municipal areas in western and north-eastern China and other areas with less-developed economies.
Those financial authorities, when unable to cover the local fiscal budget, will rely on the support of central and higher governments, or the issuance of LGBs.
Liang Ji, deputy director of the Chinese Academy of Fiscal Sciences’ public revenue research center, told Yicai that the overall local financial self-sufficiency rate has been declining since 1994, and fell to its lowest level in 2020.
The local self-sufficiency rate in 2022 will continue to contract as the growth rate of fiscal expenditure surpasses that of revenue, coupled with decreasing local tax revenues because the business tax was replaced with a value-added tax (VAT) in 2014, Liang said.
Chinese Premier Li Keqiang speaks as he arrives for the Inaugural Meeting of the Board of Governors of the Asian Infrastructure Investment Bank (AIIB) on January 16, 2016 in Beijing, China. Mark Schiefelbein - Pool/Getty Images
The move first began with a decision of the State Council that was announced by Premier Li Keqiang in a meeting at the end of 2013. Li declared that in 2014 railroad transportation and postal services would be incorporated into the pilot program of collecting VAT in lieu of business tax. In March 2016, it morphed into a nationwide implementation, covering all taxes in the telecommunications, construction, real estate, financial, and service industries.
However, the new tax strategy caused a rise in costs in the banking sector and deterred the development of technical- and labor-intensive service industries. It also led to a deterioration in the operation of transportation enterprises, according to research by Taihe Institute, a Beijing-based think tank, on May 17, 2016.
Cost of Massive and Frequent Nucleic Acid Testing Depletes Local Finances
Since the outbreak of COVID-19, the Chinese authorities have been adhering to so-called dynamic zero-immunization restrictions.
In May, China’s Healthcare Security Administration issued a circular stating that the cost of regular nucleic acid testing should be borne by local governments.
This posed tremendous pressure on some debt-ridden districts to repay the costs incurred by frequent full-staff nucleic acid testing, although health lawmakers requested in another notice that all provinces and municipalities reduce the cost of single-person testing to no more than 16 yuan (about $2.30) and the cost of mixed multi-person testing to less than 5 yuan (about $0.72) per person starting June 10.
Based on the above official data, if testing each person every three days—and China had 900 million urban residents at the end of 2021—the total annual cost of testing would be 540 billion-1.7 trillion yuan (about $77.5 billion to $246 billion).
Chinese Cities’ Hidden Debts
In October 2021, Tencent and Securities Daily, two of China’s influential media, co-published “City Debt Ratio Ranking List” ranking the debt ratio of Chinese cities. ZJnews.china.com published an article on the data.
Among surveyed first-tier and second-tier Chinese cities, 85 doubled their debt ratios in 2021 compared to 2020, and 75 doubled debt ratios from that of 2019, the report said.
Notably, the statistics don’t include hidden liabilities of local governments, among which urban investment bonds are the largest.
China’s urban investment bonds, with local governments being implicit guarantors, are issued on the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), and the interbank market, by urban investment companies, and funds raised are used for local infrastructure construction or public welfare projects.
Urban investment bonds are a unique type of bond for the Chinese Communist government. From underwriters to investors and those involved in the bond issuance process, all are considered part of the local government’s bond issuances. That is, a municipal investment company works as a financing platform backed by the local government.
In an April 2021 article published on Yicai, Zhao Wei, a chief economist of state-run Kaiyuan Securities, said that as of mid-2020 the scale of local hidden debt represented by interest-bearing debts of urban investment platforms hit 43.8 trillion yuan (about $6.29 trillion), much higher than explicit debts that total 23.9 trillion yuan (about $3.43 trillion); combined debt ratio is close to 250 percent, far overreaching the prevailing alarm point.
Moreover, since 2020, urban investment bonds raised for “repaying old debts” ran over by 85 percent, and debt interest payments are already more than 5 percent of the fiscal expenditure, which indicates local debts are intensifying in China, Zhao warned.
Jessica Mao
Author
Jessica Mao is a writer for The Epoch Times with a focus on China-related topics. She began writing for the Chinese-language edition in 2009.
