Explainer | China debt: these 3 regions have the most daunting debt piles. So what can be done about it?
- Beijing is ramping up efforts to mitigate the outsized economic implications of risky debt holdings among China’s poorest regions, reaching into its policy toolbox to fix the problem
- Top-three most indebted regions include the home of Mao-tai, a famed brand of Chinese liquor, and one where the average income is just US$6,233 a year
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, China’s Politburo – the centre of power within 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. Provincial governments have a number of existing tools to help LGFVs, including the use of debt swaps. Other solutions may involve helping [smaller] local and regional governments dispose of LGFVs’ assets, injecting operational assets into LGFVs, requesting fiscal support from [provincial authorities], and bank-loan restructuring,” the US rating agency said.
