Seventeen Chinese provinces have rolled out special refinancing bonds this month, with a total bond issuance of 726.25 billion yuan (about $103.8 billion). This issuance is intended to repay local government debts, essentially involving taking on new debt to settle old ones.
Nevertheless, analysts argue that the Chinese Communist Party’s (CCP) attempt to sustain the economy by issuing new bonds and expanding the money supply is futile.
From 2020 to 2022, local governments have issued approximately 1.1 trillion yuan (about $150 billion) of special refinancing bonds. Some local governments, such as Inner Mongolia and Yunnan, relied on these bonds to resolve their debts.
Inner Mongolia issued special refinancing bonds twice in October, with 66.32 billion yuan (about $9.47 billion) issued on Oct. 9 and another 40.38 billion yuan (about $5.77 billion) on Oct 17, bringing the cumulative total to 106.7 billion yuan (about $15.24 billion). The first round of bonds will be used entirely to repay government debt owed to companies before 2018.
Yunnan Province plans to issue two special refinancing bonds totaling 107.6 billion yuan (about $15.37 billion), becoming the province with the largest issuance scale.
At the end of last year, Yunnan’s direct debt balance amounted to 1209.83 billion yuan (about $165 billion), with a debt ratio of 257.6 percent.
The Ministry of Finance has established a government debt ratio warning threshold of 120 percent.
Since the inception of refinancing bonds in 2018, almost all regions in China have increasingly relied on issuing new bonds to settle their debts.
Developers’ Defaults Add to Local Fiscal Woes
A significant portion of China’s local fiscal revenue is derived from the real estate sector. Thus, the successive debt crises of the country’s top developers pose a direct threat to local finances.Political commentator Tang Jingyuan told The Epoch Times that a significant outcome of the bursting of China’s real estate bubble is that it will push up local debt, which poses a much higher risk than the actual defaults in real estate debt.
Apart from Evergrande, Country Garden recently announced its inability to meet debt obligations.
In August, Country Garden encountered challenges meeting the interest payments on two U.S. dollar bonds. Upon the revelation of this development, the company’s Hong Kong-listed shares swiftly deteriorated, losing their investment-grade status and subsequently getting delisted from the benchmark Hang Seng Index in September.
On Oct. 10, Country Garden announced that it could not repay a HK$470 million (about $60 million) loan on time, triggering panic among homebuyers. Reports indicate that founder Yang Guoqiang’s family has already relocated their assets, and there are unverified claims that Mr. Yang and his daughter are currently in police custody.
Multiple sources inside Country Garden told Chinese state media that the Yang family recently provided the company with an interest-free loan of $300 million to ease its debt crisis. Mr. Yang has reportedly been liquidating his assets to pay off his debts, including selling his private jet.
“Country Garden, once seen as one of China’s more stable real estate developers, has suddenly revealed that it’s struggling with massive debts this year. This is another significant blow to investors and potential homebuyers after Evergrande, which collapsed earlier and was also once considered ‘too big to fail’ by outsiders,” Mr. Tang said.
He further pointed out that the real estate bubble has grown immensely, and the number of vacant apartments nationwide is so substantial that not even China’s 1.4 billion population could occupy them all.
Local Government Borrowing Sets a New Record
Official figures indicate that by the close of 2022, the total local government debt amounted to a substantial 35.07 trillion yuan (about $5.01 trillion).In the first nine months of 2023, the CCP issued approximately 7.1 trillion yuan (about $1.01 trillion) of local government bonds, a year-on-year increase of about 11 percent and a record high for the same period.
Among these bonds, 3 trillion yuan (about $42.86 billion) were refinancing bonds, representing a 41 percent surge compared to the same period in the previous year. Refinancing bonds involve securing new funding to settle previous debts.
This year, the local government debt maturing has reached 3.65 trillion yuan (about $52.14 billion). However, there has been a significant decline in revenue from land sales attributed to the real estate market’s decline.
In the first eight months of this year, 90 percent of the principal repayments due on local government bonds were fulfilled through the issuance of refinanced bonds. In response, the CCP has called for an expedited release of the remaining refinancing bonds in the fourth quarter.
The other 4.1 trillion yuan (about $58.57 billion) in new bonds have been designated special bond capital for project construction, intended to stabilize the economy.
In August, the Ministry of Finance explicitly urged local governments to accelerate bond issuance and promptly utilize the funds. This led to a nationwide issuance of around 1.3 trillion yuan (around $18.57 billion) in local government bonds, establishing a new record high for the year and in historical terms.
New special bonds are mainly invested in projects in 13 fields, including municipal construction and industrial park infrastructure, transportation infrastructure, social services, affordable housing, new energy projects, and coal storage facilities.
The situation of local borrowing shows that if the central government does not print money and issue refinancing bonds, most local governments will go bankrupt, and their economic activities will come to a halt.
Official data further disclosed that by the end of 2022, the combined debt amount for both central and local governments reached approximately 61 trillion yuan (about $8.34 trillion), accounting for about 50 percent of China’s GDP. Within this, local government debt accounted for 35.07 trillion yuan (about $5.01 trillion). The hidden debt balance of LGFVs—which is not included in government debt calculations—soared to as high as 59 trillion yuan (about $8.43 trillion), with annual interest expenses of around 3 trillion yuan (about $42.86 billion).
CCP Cannot Control the Situation
Frank Tian Xie, a business and marketing professor at the University of South Carolina Aiken, recently told The Epoch Times that the financial risks and the resultant social problems stemming from the series of real estate collapses are exceptionally grave. The record-high levels of lending by the CCP to support local government debt highlight a critical juncture for China’s economy, potentially signifying an impending crisis.“The CCP is afraid that it will not be able to control the situation, and its most important task is to avoid risks and ensure the stability of the regime. What it can do is to issue more money to solve the pressing problem of local debts. Local debts haven’t really disappeared; they’ve simply been cleared off the books. But in reality, the ultimate burden falls on the ordinary citizens. Restarting the stagnant economy is challenging, and the lives of the common people will become increasingly difficult—it’s too difficult for them to earn money, and they’re hesitant to spend,” Mr. Xie said.
He emphasized that the CCP employs money printing to prop up its economy, hoping for an economic revival during the debt refinancing period.
“This is simply not possible! Now, the general environment has changed. With foreign investment withdrawing and Europe and the United States strengthening technological protection, the CCP’s economy will inevitably decline. No matter how much additional money is issued, it can, at best, delay the crisis for a while,” he said.
“When the debt dam eventually gives way, it will not only result in a catastrophic disaster for the affected parties but also deliver a fatal blow to the Chinese communist regime.”
