Reuters reported on the 25th that China has taken measures to restrict additional loans by pointing to 12 local governments that have not been able to resolve excessive debt.
Citing multiple sources, Reuters said three of the Northeast’s Liaoning, Jilin, southwest Guizhou, Yunnan, Tianjin, Chongqing, and minority autonomous districts (Naimenggu, Guangxi Zhuang, Ningxia Hui, Xinjiang Uyghur, and Tibet) were classified as “high-risk areas” for default, and the central government document was delivered to each local government and state-owned bank this month.
The news agency explained that only certain types of projects, such as redevelopment of urban underdeveloped areas approved by the central government or construction of low-cost housing, will be allowed in the 12 high-debt local governments.
They say that the construction of key facilities that have been formulated and promoted by local governments, such as railway stations and power plants, will be impossible without the central government’s permission.
In addition, the document is said to prioritize the repayment of debts by local governments due this year and 2024, and to allow loan extensions and loan-to-exchange loans.
In addition, Reuters reported that Chinese authorities have also nailed that the debt growth rate of local government financing vehicles (LGFV), a special corporation for financing local governments, should not exceed the average debt growth rate of the local government-based corporate sector.
Local governments in China have seen their debts rise rapidly amid huge quarantine spending under the three-year “zero-COVID” policy, years of excessive infrastructure investment and a slump in the real estate market.
Earlier this year, as the Chinese economy slowed down, more and more local governments issued bonds for debt repayment because they could not repay their debts.
In particular, the money that local governments spent on LGFV to finance infrastructure construction has been considered a big risk factor for the Chinese economy as a “hidden debt” that is not caught in official statistics.
The International Monetary Fund (IMF) believes such hidden debt will amount to 53% of China’s gross domestic product (GDP) this year, while Goldman Sachs estimates that the total debt of China local governments, including LGFV debt, will amount to about 23 trillion dollars.