How $11,000 Billion Local Governments Debts Are Hidden and Handled | China Truths

Welcome to China Truths. In this episode, we will bring you the following story. How $11,000 billion local government's debts are hidden and handled. Now, let's dive into the details. It's all covered in today's China Truths. How $11,000 billion local government's debts are hidden and handled. The Wall Street Journal reported on November 29 that the bursting of China's real estate bubble and the loss of traditional income sources like land sales have exacerbated its already significant debt issues. Economists estimate that China's local governments may have hidden debts totaling as much as $11 trillion, while Beijing's current rescue measures amount to little more than a drop in the bucket. Meanwhile, U.S. President-elect Donald Trump's remarks on imposing punitive tariffs on Chinese goods add further risk of stagnation to China's economy. Local governments in China are responsible for driving the majority of investment projects, employing civil servants, and outsourcing business to private enterprises. Thus, their fiscal challenges indirectly impact household finances. The Hong Kong-based nongovernmental organization China Labor Bulletin CLB, which monitors labor strikes and safety incidents across China, reports that approximately 1,200 protests occurred this year over wage arrears or compensation disputes, compared to over 1,600 last year. Both figures significantly exceed the 700 protests in 2022 and 900 in 2021. Fiscal tightening has led to public service interruptions in certain regions of China. For instance, cities like Wuhan, Dalian, and Guangzhou have cut back on public health care benefits. In Henan-Shanqiu, a public bus company nearly went bankrupt last year due to lack of funds. Last month, in Shanwei, Guangdong, dozens of medical staff gathered in a hospital lobby holding blank sheets of paper with We Need to Eat written on them to protest delayed salaries and bonuses. Similarly, retired civil servants in Iquan, Jiangxi, protested months of unpaid pensions, and in Datong, Shanxi, banners reading Pay Me My Hard-Earned Wages were hung on local government buildings. Over the years, local governments have borrowed through complex state-owned financing vehicles to fund projects with limited economic benefits, such as underutilized railways, unoccupied industrial parks, and even ski resorts in areas with minimal snowfall. Since the real estate boom has deflated, revenue from land sales has plummeted. Victor Shi, a professor studying China's political and financial systems at the University of California, San Diego, noted that at certain points last year, provincial debt repayments exceeded 125% of their monthly revenues. At the end of last year, Beijing acknowledged the need to manage hidden debts amounting to $2 trillion. However, economists estimate the actual total to be between $7 trillion and $11 trillion, with as much as $800 billion in debt at high risk of default. In early November, Beijing announced a local government debt refinancing plan, allocating 10 trillion yuan, or about $1.4 trillion, in debt resolution resources to restructure hidden debts. One approach involves replacing short-term debt with long-term debt, extending maturity dates so only interest payments are required without repaying the principal. While this eases cash flow pressures, Victor Shi remarked that it is merely a temporary fix with limited effect. To increase revenues, local governments are also demanding back payments of corporate taxes, property taxes, and consumption taxes. Listed companies in China have reportedly paid 463 million yuan in back taxes this year. In Hubei province, a distillery was required to pay 85 million yuan in consumption taxes owed from 1994 to 2009. Related arrears totaled 178 million yuan last year and were zero before then. Enforcement agencies have intensified fines, fees, and asset seizures to generate cash. For instance, Bishan District in Chongqing has set up a task force dubbed Smash Pots and Sell Iron to liquidate assets and repay debts. Renowned economist Qing Xiaonong has incisively revealed the true creditors behind the massive local government debts in China. He argues that few Chinese citizens realize their household financial assets are directly tied to the enormous debts of local governments. In reality, most local government borrowing relies on draining residents' savings, with banks acting as enablers. Tragically, the Chinese government has kept citizens in the dark, leaving them unaware that their savings have long been swallowed by the government. The Chinese government employs two primary methods to fund its extravagant spending. Exceeding fiscal revenues such as taxes by massively increasing expenditures, creating significant central government deficits financed by large-scale money printing by the central bank. Issuing government bonds, mostly domestically, as Chinese yuan bonds are not popular international investment vehicles. The first method essentially uses inflation to cover government spending. This approach, which macroeconomists consider a poison pill, inevitably leads to currency devaluation and price inflation, reducing consumer purchasing power and eroding savings. China's official budget deficit is set at 3% of GDP for 2024, similar to the EU's fiscal rules. However, the total outstanding public debts, equivalent to GDP, is a more alarming indicator of long-term fiscal stress. While fiscal deficits cause immediate inflationary pressures, excessive public debt has long-term consequences, including the erosion of household savings. Notably, China's massive public debt effectively empties citizens' bank accounts, as issuing government bonds allows the government to covertly appropriate savings. However, China's banking system is already under immense strain due to local government debts, raising concerns of systemic collapse. For 2024, China's fiscal deficit is set at 4.06 trillion yuan, 180 billion yuan higher than 2023. Of this, the central deficit is 3.34 trillion yuan, while local deficits account for 720 billion yuan. Earlier this month, China's National People's Congress approved an additional 6 trillion yuan in new local government borrowing over three years. The IMF estimates local government debt at 40 trillion yuan, with an additional 65 trillion yuan owed by state-owned financing companies, many on the verge of bankruptcy. Combined, these debts threaten to collapse the banking sector. To mitigate the crisis, Beijing has approved 6 trillion yuan in new borrowing, primarily to pay interest on the most urgent debts, delaying a full-blown banking crisis. Unlike private economies, China's state-run banks serve as ATMs for government borrowing. Local governments particularly exploit municipal banks, which are often fully under their control. Government bonds are primarily purchased by local banks, with over 81.5% of bonds held by the banking sector. Among these, city banks shoulder disproportionate burdens, making them especially vulnerable. China's fiscal crisis has morphed into a banking crisis, leaving the banking sector as the last line of defense. While the precise timing is uncertain, signs suggest China is approaching a critical financial juncture.