Commentary
For years, China’s local governments have supported growth by borrowing and spending heavily. Now, the accumulated debt threatens to put yet another hurdle in front of China’s development.
As the long-delayed Third Plenum session ends, it is far from clear what the Chinese regime’s five-year plan will involve. Beijing seems to think that its earlier efforts to deal with the property crisis are sufficient. The meeting produced little new on this front. That is unfortunate, for more is needed. It was helpful that the meetings mentioned the need to deal with local government debt, but here, too, the proposed program, if there is one, is distressingly short on details. Without an effective program, this local government debt overhang will hold back Chinese growth even in the unlikely event that the property crisis lifts.
The local government debt problem pivots on what are called local government financing vehicles (
LGFVs). For years, planners in Beijing promoted LGFVs to allow local governments to borrow the huge amounts needed to finance Beijing’s infrastructure projects. Because the debt is held in the LGFV instead of on the local government’s balance sheet, the process allowed local government borrowers to avoid statutory and customary debt limits and, in many respects, even public scrutiny. Because the government connection also made lenders much less careful than they otherwise might have been, this off-the-books so-called “shadow debt” has, over the years, grown to huge proportions. At last count, the amounts range from $7 to $11 trillion. This is twice the size of China’s central government’s debt in Beijing.
These LGFVs stood behind the huge Chinese infrastructure projects that awed Western observers over the years—the massive apartment complexes, dazzling provincial city centers, broad highways, bridges, rail links, ports, subways, light rail systems, and the like. The spending and employment involved in these projects boosted China’s growth figures and falsely made the party’s leadership look good. And especially early on, the progress was real. But over time, the returns from each new project have had less and less ability to support the debt incurred to move it forward. This unsupportable debt now threatens to unravel these former practices.
At the most basic level, the fault for this mess lies with the centralized planning on which the Chinese Communist Party relies and which has directed local government borrowing and spending. Because the projects came out of government decision-making, they tended to reflect political rather than economic priorities. Early on, this distinction mattered little. China’s underdeveloped state made needs obvious. However, over time, the political preferences of Beijing had less to do with economic needs, and consequently, they paid less adequate returns. Estimates that the equivalent of some $800 billion in LGFV debt will never be repaid are in large part why the credit-rating agencies, Fitch and Moody’s,
downgraded China’s financial prospects. Local governments are staggering under the weight of these unmanageable obligations. Some local governments are even having difficulty providing their populations with essential services. Meanwhile, Beijing has lost a major contributor to growth.
Left unattended, the LGFV problem could do even more harm than the headline-grabbing property crisis. Even should a plan emerge, likelihoods suggest that it will be inadequate for the task. At least, that is the message of the halting and tentative manner in which Beijing has moved to address the property crisis. Even if the planners prove themselves capable of direct and forceful action on this front, it will take years to straighten these matters out, years in which China will have no way to recapture the pace of growth it once enjoyed and that Beijing’s ambitions demand.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
