Chinese economy: financial difficulties of local governments increase the risk of payment default and weigh on the average Chinese

Growing financial distress in China’s regions raises the risk of local governments defaulting on their bonds, as the country pursues its costly zero-Covid strategy.

Weakening local government finances have been a growing concern in recent weeks, raising questions about whether Chinese local authorities will have to cut spending on utilities, and the overall rising costs of keeping public utilities in place. national coronavirus control measures.

Many Chinese local governments have been struggling with tight budget budgets for years. In recent weeks, Changshou District in southwest Chongqing Municipality and Neijiang City in Sichuan Province have started charging people to stay in quarantine facilities. centralized facilities that were previously entirely funded by the government.

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In Changshou, non-local residents who stay in one of the quarantine centers now have to pay up to 300 yuan ($40) per day, according to a notice posted on the government’s WeChat account on Sept. 21.

There are exceptions, such as for doctors and students, but when the mandatory quarantine period lasts for a week, an additional expense of 2,100 yuan is simply unaffordable for some people.

The disruptions demonstrate that there are weaknesses in the ability of some local governments to protect public services

Luo Zhiheng, Yuekai Securities

China’s zero Covid policy imposes mass screenings, lockdowns and long quarantines. The policy has even pushed some local governments to transfer possibly “exposed” people to quarantine centers instead of allowing them to self-quarantine at home, as an extreme way to curb local infections.

Disruptions to public transport services have also been reported in provinces such as Henan, Hunan and Guangdong due to financial problems, and these problems reflect the growing challenges faced by some local governments, said Luo Zhiheng, analyst. Chief Macroeconomics at Yuekai Securities Research Institute. .

“It affects everything from driver salaries to the ability of low-income groups to travel,” Luo said in a note last week. “The disruptions demonstrate that there are weaknesses in the ability of some local governments to protect public services.

Between 2021 and 2025, about 3 trillion yuan ($415 billion) of bonds sold by local government financing vehicles (LGFVs) will mature each year, and the pressure to redeem has become more and more important, according to analysts.

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LGFVs are off-balance sheet platforms that have been extremely popular with local governments in China as a source of borrowing, but disclosure of the use of funds is often poor.

On the evening of August 29, an LGFV in Gansu province, called “City Development of Lanzhou”, rushed at the last minute to pay interest on a bond listed on the interbank market, after the Shanghai Clearing House announced earlier today that it had not received sufficient funds from the LGFV to meet its interest payment obligation. The delay in interest payments immediately raised questions about the risks of a possible default of LGFV bonds in the listed market.

“LGFV problems will worsen as their government owners will not be able to mobilize as many resources to support the vehicles in servicing debt,” Laura Li, credit analyst at S&P Global, said in a note. of September 5. falling land sales, increased government spending related to Covid measures and an economic slowdown in China.

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China’s growth is slowing and it is unlikely to meet its annual gross domestic product (GDP) target of “about 5.5%” this year. Beijing has pushed local governments to borrow at record rates to build infrastructure projects, with the aim of boosting local economies, and therefore the national economy.

S&P said the Lanzhou City Development is an important LGFV engaged in urban redevelopment, utilities and bus services in Lanzhou, the provincial capital of Gansu. The company’s cash crunch has been simmering since the second half of last year, mainly because it was cut off from capital markets, the US rating agency said.

Yuekai Securities’ Luo said local governments face a dilemma as some of the LGFVs’ incomes plummet and they struggle to repay their debts.

“Whether [local governments] decide to intervene, their finances will be even worse. But if they don’t, it could affect the regions credit record and their ability to track down funds,” Luo said.

Local government general budget revenue fell 7.9% in the first half of 2022, according to a report by US ratings agency Moody’s Investors Services, due to coronavirus-related disruptions and the nation’s tax refund policy. large-scale implementation in the second quarter.

Nowhere is the stress of the property sector more apparent than in local government finances

Logan Wright, Center for Strategic and International Studies

Land sales fell 31.4% in the first half of the year, and Moody’s expects land sales growth for the year as a whole to remain in the “negative double digits”.

Logan Wright, associate chair of Chinese business and economic administration at the Center for Strategic and International Studies think tank in Washington, said a default of obligation by an LGFV is “only ‘a matter of time’, given local government finances. distress and declining income from the sale of land.

“Nowhere is the stress of the real estate sector more apparent than local government finances,” Logan said in a September 21 blog post.

“The period immediately following the 20th Party Congress this fall could be particularly dangerous, given that newly appointed local officials will likely wait until the end of the political season in the next two months before trying to extricate themselves from the debt of their predecessors from November,” Logan said. predicted.

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Sarah J. Greer