After the real estate crisis, some experts believe that local governments’ debt has become another ticking time bomb for China.
Over the past three years, China’s harsh zero-COVID policy has worsened local governments’ finances.
Following the central government’s instructions, Chinese provinces and cities must spend vast sums of money on Covid testing and quarantine measures.
When the overall economy falters, local governments face a sharp decline in fiscal revenue.
Chinese media reported that, due to tight budgets, some localities began to reduce their public transport trips and lower the salaries of civil servants, which triggered fierce protests.
Some cities, such as Changshu and Neijiang, have required those subject to undergo compulsory quarantine and to pay for it themselves.
In China, quarantine must be done at a designated isolation center or hotel, and home isolation is not recognized.
Since 2021, provinces and cities have been trying to fill the hole in their budgets by using a funding mechanism called local government financing vehicle, or LGFV.
Local authorities have set up LGFVs to raise money for infrastructure and public welfare projects, such as highways, train stations, and airports, including the cost of building quarantine centers and COVID-19 testing.
However, according to Caixin, tighter oversight of their borrowings and growing pressure to find more money to help local authorities boost investment have left them strapped for cash.
More and more LGFVs have been failing to repay the money they owe to suppliers in the form of commercial paper debt.
So this financing tool has become unfavorable.
How high the debt of LGFVs is at this time can only be guessed. Investment banks claimed that China’s local government debt should be between $6 trillion and $7 trillion.
As local governments have been facing a sharp decline in fiscal revenue, some experts believe that local governments’ debt has become a ticking time bomb.
According to the Swiss newspaper Neue Zürcher Zeitung, with the downturn in the real estate sector, Chinese local governments have also encountered financial difficulties because the sale of land use rights is one of their main sources of fiscal revenues.
Some local governments came up with a rare practice. They sold land use rights to their own local financing vehicles.
In the first half of this year, local government financing vehicles accounted for 25% of land sales, though they do not have experience in developing real estate projects.
Chinese authorities have been aware of a potential time bomb from local governments’ debt and are seeking to mitigate the situation. They have asked local governments to reduce the risks in local financing tools.