Local governments in China issued 3.8 trillion yuan ($580 billion) in municipal bonds in 2015, almost eight times the amount of debt they issued in 2014. The bonds were China's latest step to deal with its ballooning local government debt problem. By some estimates, China's provinces, regions and municipalities are on the hook for more than 30 trillion yuan in debt. Experts cautioned that local government debt could lead to serious consequences, and local governments need to stop pursuing real estate projects as the ultimate solution to the local government debt.
China's soaring local government debt has received a lot of public attention lately.
In 2015, local governments in China issued 3.8 trillion yuan ($580 billion) in municipal bonds, almost eight times the scale of debt in 2014. Experts have also predicted that the debt will skyrocket again this year.
Theoretically speaking, local government debt is still manageable. In 2015, only four provinces in China saw their debt-to-GDP ratio exceeding 100 percent - the threshold considered dangerous by international standards.
Northeast China's Liaoning Province's debt-to-GDP ratio was 197 percent in 2015. The figure was 120 percent in Southwest China's Guizhou Province, 111 percent in Southwest China's Yunnan Province, and 104 percent in North China's Inner Mongolia Autonomous Region.
Still, experts pointed to the more serious side of the problem.
As China's economy slides, and demand for real estate shrinks, many local governments might have trouble repaying their debt in the near future.
Growing liabilities
China's local government debt has reportedly ballooned in recent years. By the middle of 2013, China's total local government debt had skyrocketed to an estimated 17.9 trillion yuan, up from "negligible levels" in around 2000, according to a report by the Wall Street Journal in August 2015.
Domestic media put the figure lower, though still high. By the end of 2014, local government debt amounted to 15.4 trillion yuan, the Xinhua News Agency reported on August 29, 2015.
However, both domestic experts and overseas financial institutions believed that the figure was largely underestimated.
According to the most recent estimate by the China Society of Macroeconomics (CSM), China's local government debt was at least 30 trillion yuan at the end of 2014, said Tian Yun, director of the CSM's research center.
According to the Wall Street Journal report, the ballooning local government debt is a "hangover" from the Chinese central government's efforts to boost growth in the wake of the 2008 financial crisis.
The debt-fueled spending binge worked, but left the local governments with large liabilities.
As for 2015, local governments directly issued 600 billion yuan in bonds, according to data released by the People's Bank of China on January 25.
Local governments were also allowed to refinance another 3.2 trillion yuan in debt through the central government's recently launched debt-for-bond swap program.
Tian said local governments will only get more indebted in 2016.
"I assume that municipal bond issuances will climb further this year, with new debt hitting 5 trillion yuan," Tian told the Global Times on Tuesday.
Tian's forecast was roughly in line with estimates by domestic financial institutions. Everbright Securities predicted local government debt will rise by 5 trillion to 6 trillion yuan in 2016. China International Capital Corp gave a figure of 4.5 trillion to 5 trillion yuan.
Local governments likely have no choice but to continue taking on debt, said Tan Haojun, an economics commentator.
"Local governments still have a lot of quality-of-life projects that need to be completed. Besides issuing municipal bonds, it is hard for them to find means to fund those projects," he told the Global Times on Thursday.
Real danger
But Tan also noted that mounting local government debt has great potential risks, as many local governments might not be able to repay their debt given sliding real estate prices.
Over the past few years, local governments took on a lot of debt to finance real estate projects, said Lin Yixiang, president of the Beijing-based TX Investment Consulting Co. The governments borrowed money to develop real estate projects, and then used the profits to repay their debt.
As a result, house prices soared in many cities, Lin said. It also led to a severe imbalance in supply and demand.
Because the real estate market has cooled, there is a lot of doubt about whether local governments can continue to rely on real estate for funding. Land transfer revenues in 10 cities slumped 5.7 percent year-on-year in 2015, chinanews.com reported.
"I assume the real estate market would still have a major impact on local debt in 2016. If the housing market improves, it will take some of the pressure off local governments," Tan said.
Cutting back
To help local governments deal with their increasing debt loads, the central government has launched several measures over the past year. In August, it imposed a 600 billion yuan limit on the direct debt that local governments are allowed to borrow in 2015.
The central government also launched and then expanded to a 3.2 trillion yuan local debt refinancing plan in 2015. Under that program, China's local governments can replace high-interest debt with low-interest bonds, giving them more breathing room.
The refinancing plan, however, is not a permanent solution, said Yu Fenghui, a financial commentator. Rather it just buys time for the local governments.
To actually solve the problem, the central government needs to further restrict how much money local governments can borrow.
"Local governments should not be allowed to borrow large sums of money from any sources until the current debt problem is solved," he told the Global Times on Wednesday.
He also noted that local governments should identify projects with stable returns, such as urban rail transit, rather than rely on high-return projects that carry large risks of bad debt.
Tan said that after the refinancing plan was launched, many local governments are "kind of relaxed" and returned to business as usual.
"This is troubling," he noted.
If local governments want to make it easier to repay their debt, they should cut administrative costs.
"The administrative structures in many domestic cities' have too many redundant personnel. Efforts should be made to cut administrative costs and direct labor to the real economy," he noted.
