China’s $ 2.3 trillion hidden debt could climb even more: report

China's $ 2.3 trillion hidden debt could climb even more: report

Chinese local governments had $ 2.3 trillion in hidden debt until last year, according to a report.

Chinese local governments had 14.8 trillion yuan ($ 2.3 trillion) in hidden debt last year, and that number could rise further this year, according to a government-related think tank.

Local governments were under pressure to increase infrastructure investment and support growth during the pandemic, leading to a 6% increase in off-budget borrowing from a recent low of 13.9 billion yuan in the third quarter of 2019, according to Liu Lei, a senior official. researcher at the national finance and development institution.

Hidden debt is made up of funds raised by government-linked entities for infrastructure and other public projects, and carries an implicit official guarantee of repayment. Bonds sold by Local Government Finance Vehicles, or LGFVs, are an example of how provincial authorities raise funds to increase spending without including them in their official balance sheets.

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China has pledged to stabilize its macroeconomic debt ratio and lower the public debt ratio this year to limit risks. This could be difficult to achieve because the budgeted spending is not enough to cover the investments needed to stimulate the targeted growth of the economy by 2035, said Liu, whose organization depends on the influential Chinese Academy of Sciences. social, state-run, and advises the government.

“Local governments will find ways to increase hidden debt because they are under pressure to increase investment,” Liu said in an interview. “In the longer term, the economy still faces many headwinds, including an uncertain external environment and an aging population.”

China does not have an official record of hidden local government debt because it is technically against the law. Estimates from different institutions can vary widely.

Liu’s calculation includes bonds issued by LGFVs and borrowings by government-linked trust funds, insurers and other investment companies. It does not take into account bank loans to LGFVs, which can be used on commercial projects instead of public welfare projects.

The hidden debt could have resulted in more than 700 billion yuan per year in additional interest payments, as these loans are more expensive to maintain than government bonds, he said. It also creates risks for the stability of the Chinese financial system, as the debt has been bought by all kinds of financial institutions, including banks, brokerage houses and trust funds, Liu added.

Last year’s increase came after debt fell from a peak of 16.6 trillion yuan in 2016, as authorities turned some of the borrowings into government bonds and transferred them to government bonds. official balance sheets.

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