The risk of China’s debt crisis is building up. The current main solution of de-leveraging and reducing debt is not only raising the real economy’s financing costs by a large margin, but also increasing the structural tension of liquidity. China needs structural solutions in order to effectively solve the issue.
Zhang Monan
At the end of 2013, the National Audit Office exposed Chinese government debt to be 20.7 trillion yuan ($3.4 trillion) by June 2013, and the overall government debt to be 30.28 trillion yuan. Of this, 17.9 trillion yuan is local government debt. The Chinese government debt ratio is 39.4 percent, much lower than the international warning line of 60 percent.
In fact, the main risks lie in the debt’s structure and the price risk. The government debt structure shows that 54 percent of government loans’ deadline is more than five years later. From 2011 to 2015, a lot of local government debts are entering a period of repaying capital and interest. In local governments’ outstanding obligations at the end of 2010, 24.49 percent and 17.17 percent should have been repaid in 2011 and 2012 respectively. And 11.37 percent, 9.28 percent and 7.48 percent should be repaid in 2013, 2014 and 2015. The rest is due after 2016.
The years 2011 and 2012 saw a considerable part of the government debt repaid, aggravating the local government’s financial pressure. According to the model prediction, the local governments will have their financing gap after 2014. Even if they borrow new loans to repay old debts, there will be absolute financing gaps for local governments after 2015.
The local government debt burden will be the heaviest in 2013 and 2014. The growth of matured debt will then increase speed in the future two years. But it will be very difficult for the government revenue to simultaneously increase. By then, local governments and their financing platform will face a greater pressure of repaying the capital and the interest.
Thus, to solve the looming debt crisis, the government must optimize the structure of its overall debt, instead of only controlling the debt growth. Besides allowing local governments to issue government bonds, there are five new solutions to the problems.
Firstly, the government can consider transferring its stock assets, such as roads, bridges, tunnels, water works, etc to investment groups and turn them into fixed assets of investment groups.
Second, the central government can set up “bad debt banks” for local governments, which are in charge of disposing of local government debts and non-performing assets. The banks should dispose of non-performing assets through a combination of debt or transfers.
Or, the central government can establish a property rights market of infrastructure construction, and build up investment projects for local governments to transfer parts of their State-owned stock rights, and to activate the assets of local government financing platforms as a new means of raising funds.
Third, the government can set up a special account for public earnings in local government budgets to turn some quasi-municipal bonds into municipal earning bonds and lower the government financing’s influence on social financing and, especially, the financing of the real economy.
Fourth, the government should establish a management and reserve system for land transfer revenues, a land acquisition performance evaluation system, and to make local government balance sheets match spending responsibilities with earning capacities in order to improve the transparency of local government budget execution.
Fifth, the central government should end its covert guarantee system, which is closely related to the unrestricted expansion of local government debt. The government’s covert guarantee is actually a way of using government credits. Because local governments cannot easily read their financing costs, their debts become low-risk and high-yield assets, squeezing the real economy out of the financing market and distorting the national industrial structure.
Since the international financial crisis of 2008, local governments have obtained huge amounts of money for their financing platform and the industries they support through off-balance-sheet loans and inter-bank debt financing.
It is especially noteworthy that the ambiguity of debt liability and the blurring of labor and rights distributions among governments of various levels will necessarily transfer the debt crisis risk to higher authorities, threatening the central government finance directly, once the accumulated debt risks exceed the endurance of local governments. That’s why the central economic work conference for 2014 stressed that the provincial and city governments must be responsible for the local government debts in their own prefectures.
Zhang Monan is a researcher at the Strategic Studies Department of the China International Economic Exchange Center.
