China’s hidden local government debt has burgeoned to more than half the size of its economy, Goldman Sachs Group Inc says. The assessor said Beijing would need to be flexible in tackling this as revenue was already under pressure due to a slowdown in land sales. The total debt of local government financing vehicles increased to about 53 trillion yuan ($ 8.2 trillion) at the end of 2020 from 16 trillion yuan in 2013, the economists wrote in their report. That is as much as about 52% of the gross domestic product (GDP) of China and larger than the amount of official outstanding government debt.
The LGFVs are a tool for governments to borrow money without making it appear on their balance sheets, but financial markets see it as no different from government liability.
There were some signs earlier this year that the CCP government was succeeding in reducing this debt as the economy’s bounce-back gave room to concentrate on tackling financial risks. But now that that the Chinese economy witnesses reluctant consumers and other obstacles, a housing market crisis that has caused demand for land to plummet, power crisis and supply chain disruptions, markets are expecting a rethink of that hawkish policy stance by Beijing.
“More official local government bond issuance and increased flexibility on local government financing are probably needed to support overall economic growth” as land sales are slowing, economists led by Maggie Wei wrote in the Goldman Sachs report.
Land sales are a major source of revenue for local governments in the large Asian country where sales have slowed down as the crisis at property developer China Evergrande Group deepens. To compensate for the funding gap caused by the shrinking land sales revenue, Goldman Sachs recommended that the government raise the bond quota for 2022 by more than 500 billion yuan from the 2021 level of 3.65 trillion yuan.
The liabilities of local financing vehicles are concentrated on construction, transportation and industrial conglomerates sectors. These three sub-industries are borrowing close to 40% of the total LGFV debt.
Jiangsu tops all the provinces in the size of the borrowing, with about 8 trillion yuan in 2020
Tianjin, Beijing, Sichuan, Guizhou and Gansu are the most leveraged provinces as a share of local economic output.
Around 60% of the bonds issued by local platforms are used to repay maturing debt in 2020-2021, rather than new investment.
China does not have an official account of local governments’ hidden debt, as it’s technically against the law, and private estimates by different institutions vary significantly.
An estimate by S&P Global Ratings in 2019 put the size at 20 trillion yuan, while another that same year from Rhodium Group put it at 41.2 trillion to 51.7 trillion yuan. According to a government-linked think tank, there was 14.8 trillion yuan of hidden debt in 2020. Goldman’s calculation is based on an analysis of more than 2,000 LGFVs’ statements of their interest-bearing debt, including bonds and bank loans.