China’s local government debt woes hurting private firms, creating grass-roots distrust: academic

A two-decade pursuit of vanity projects has left many local authorities in China in a deep morass of debt, with their status as “the largest local defaulters” not only having a knock-on effect on private businesses, but also adding to a grass-roots governance crisis, an academic has warned.

Feng Chuan, an associate professor at Wuhan University’s School of Political Science and Public Administration, called for greater efforts to rebuild social trust and business confidence after finding that officials, residents, local government financing vehicles (LGFVs), contractors and banks had been caught in the debt limbo.

“Credit overdraw systematically occurs … tearing apart the fundamental trust system that upholds social governance order,” he wrote in an article published last month on news portal NetEase.

Local government debt rose by 14.3 per cent year on year to 41.4 trillion yuan (US$5.7 trillion) by the end of February, according to data obtained from the Ministry of Finance and reported by state-run Xinhua News Agency on Tuesday, although the figure does not include so-called hidden debts, including LGFVs.

LGFVs flourished following the 2008 global financial crisis as a way of funding China’s infrastructure building spree, with few generating returns. The debt raised is kept off the balance sheets of local authorities, yet carries an implicit government guarantee of repayment.

Beijing has already made efforts to relieve the pressure by suspending infrastructure projects in some of the most indebted provinces and providing funds through transfer payment channels and special treasury bonds.