After years of rapid economic growth, the resources held by local governments across China have seen a worrisome decline in the midst of a slower-than-expected economic recovery and a nationwide property market downturn. For the first time, the Politburo of the Communist Party stipulated at a meeting last month that it was necessary to resolve debt risks at local governments with “a comprehensive solution to local government debt”. The statement highlights the central government’s increased focus on the financial difficulties facing less-developed regions, as well as preventing systemic risks, according to a research note by Fitch Ratings on August 6. Since the start of this year, fears have grown over a public default on repayments of debt sold by local government financing vehicles (LGFVs), hybrid entities that are both public and corporate and were created to skirt restrictions on local government borrowing and have proliferated since the global financial crisis in 2008. “However, we believe that the central government will avoid a bailout of troubled LGFVs, as this could create a ‘moral hazard’ risk,” Fitch said. Based on a report by Moody’s Investors Service using 2022 figures, the South China Morning Post identified China’s three regions with the highest debt-to-GDP ratio, which compares the amount of debt in each region to the size of the economy. The debt component comprises public debt held by provincial governments and their LGFVs.
With a debt-to-GDP ratio of 138.3%, Tianjin is China's most indebted region. The coastal city on the shore of the Bohai Sea, was once one of China’s most developed industrial and manufacturing hubs, but as its economic growth has declined over the years, it has struggled with its finances. It is one of the four provincial-level governments that did not set their real GDP-growth target above the 5% national target for 2023. Tianjin’s real GDP growth was just 1% in 2022, and its foreign direct investment (FDI) has also steadily declined from USD21.13 billion in 2015 to just USD5.39 billion in 2021, according to the Hong Kong Trade Development Council (HKTDC). Moody’s expects that LGFVs in Tianjin will see more than half of their bonds mature in the next 12 months, but its fiscal revenue in the next year is relatively low.
Guizhou, a landlocked province in southern China famed for its Maotai brand liquor, has a debt-to-GDP ratio of 137.2%. It has been amassing debt after years of hefty infrastructure spending, while not all of the projects have delivered the benefits that the local governments had hoped for. Guizhou is currently constructing the canyon-spanning Huajiang bridge at an estimated cost of CNY2 billion. At a length of 2,890 meters and a bridge floor 625 m above a river, the bridge will be the highest in the world. Comments by Guizhou officials in April that the region was not able to manage its debt repayment based on its revenue triggered widespread concerns.
Northwest Gansu’s GDP in 2022 totaled CNY1.12 trillion, but its per-capita income was just CNY45,000 – the lowest among all Chinese regions – and a debt-to-GDP ratio of 123.4%. “The province’s fiscal revenue is relatively small, and its dependence on central government transfer payments is relatively high; traditional industries contribute a relatively high proportion of tax revenue, and the gap between fiscal revenue and expenditure within the province is relatively large; the government’s debt burden is also relatively big.
The next seven regions with the highest debt-to-GDP ratios are Qinghai (105.8%); Chongqing (101.3%); Zhejiang (101.2%); Yunnan (101%); Sichuan (100.3%); Jilin (95.6%) and Jiangxi (92.8%), the South China Morning Post reports.
