10 teapots and only 7 lids: Local government debts proving harder to hide

“十个茶壶七个盖,许多地方债务问题都快捂不住了”

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As worries grow day by day of rising local government debts, this Xinhua Economics report highlights bankers fears in dealing with local governments. One senior banker reveals that “owing to more stringent risk management controls, banks would rather ‘shake hands’ than ‘hug’ local governments”.

Maybe they’d also like to wash their hands afterwards, as the senior banker warns “many local governments are finding it increasingly difficult to conceal their mounting debts”.

The reporters note that in light of the economic downturn, across all of China local government income is declining at a faster rate, making debt problems harder to conceal. Combine this with the recent drop in land and property markets, the previous widespread policy of relying on land to support local borrowing is proving harder to sustain.

As the local government debt risk piles up, and repayment deadlines loom large, local governments are resorting to…selling more land, and selling quicker than before. This increases banks worries on local government debt, which leads to local governments being squeezed on all sides.

Many officials and experts believe that the local government debt problem is one of the biggest obstacles to China’s economic reform. One Party secretary in Inner-Mongolia said that if it wasn’t for the mining industry decline, his local government could have paid off their debts using their own financial resources.

For some local governments experiencing debt problems, the debt levels and slowing economy seem to be forming a vicious circle, making the growth effects of investment weaker over time. By April this year, fixed asset investment was at a thirteen year low.

Local government bonds, which are to form the main method of fund raising, have only just been introduced in test pilot schemes. For some local governments which rely heavily on the property, they’re facing declining investment power and the threat of ‘stalling’.

One provincial official in Central China said due to the fund raising demands this year, some local governments are increasingly reliant on land revenues. Data shows that as a proportion of non-tax revenues, land revenues are up 30%.

(Article not to be copied or reproduced without permission or citation).

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