China’s hidden debt of $ 2.3 trillion is seen to be on the rise

Beijing: Local governments in China had 14.8 trillion yuan (2.3 trillion US dollars) in hidden debt last year, and the number could rise even further this year, according to a government-linked think tank.

Local governments have been under pressure to increase infrastructure investment and support growth during the pandemic, leading to a 6% increase in off-budget borrowing from a recent low of 13.9 billion yuan in the third quarter of 2019, according to Liu Li, a senior official. Researcher at the National Foundation for Finance and Development.

Hidden debt consists of money raised by government agencies for infrastructure and other public projects, and carries an implicit formal guarantee of repayment.

Bonds sold by local government financing institutions, or LGFVs, are one example of how regional authorities raise money to increase spending without including them in their official balance sheets.

China has pledged to stabilize its overall leverage and reduce government debt this year to curb risks.

This could be difficult to achieve because budget spending is insufficient to cover the investment needed to drive the economy’s targeted growth by 2035, said Liu, whose organization is governed by the influential state-run Chinese Academy of Social Sciences and advises the government.

“Local governments will find ways to increase hidden debt as they are under pressure to expand investment,” Liu said in an interview. “In the long term, the economy is still facing a lot of headwinds including the uncertain external environment and an aging population.”

China does not have an official hidden debt account for local governments, as it is technically against the law. Estimates by different organizations can vary widely.

The Liu account includes bonds issued by LGFVs and borrowing by trust funds, insurance companies, and other government-related investment firms. It does not take into account bank loans provided to LGFVs, which can be used for commercial projects rather than general welfare projects.

He said the hidden debt could have triggered an additional payment of more than 700 billion yuan annually, because such borrowing is more expensive in service than government bonds.

This also creates risks to the stability of the Chinese financial system, Liu added, as debt has been purchased by all types of financial institutions, including banks, brokerage firms and trusts.

The rise last year came after debt declined from a peak of 16.6 trillion yuan in 2016, as authorities converted some borrowing into government bonds and transferred them to official balance sheets.

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