China accelerates massive issuance of local government bonds

Chinese local authorities accelerated the issuance of large-scale local government bonds (LGBs), with the total amount reaching trillions of yuan (billions of US dollars) in September.

LGB issuance soared to 6.08 trillion yuan (about $1.1 trillion) from January to August, up 24% year-on-year. Among them, a newly added local bond rose 62.4 percent, totaling 4.021 billion yuan (about 581 million U.S. dollars), as reported by official media Securities Daily on Sept. 2.

The trend is accelerating, as 43.1 billion yuan (6.1 billion dollars) of LGB were issued from August 29 to September 2, and 56.9 billion yuan (about 8.1 billion dollars) the following week, according to Wind, a provider of financial data services. , and cited by 21 Jingji, supported by the state.

In China, LGBs can be described as: by purpose, newly added and refinanced. Rollover bonds refer to funds raised to repay the principal of maturing LGBs.

The first eight months of this year saw the issuance of newly added bonds worth 4.2 trillion yuan (about $604 billion), which was beyond expectations, an investment consultant said in the report. of the Securities Daily.

In addition, the subsequent issuance of refinancing bonds is expected to significantly exceed last year, said Fen Lin, senior analyst at Beijing-based Golden Credit Rating, citing that the maturity of local bonds between September and December would be around 1.04 trillion yuan (around $197). billion), up 174% from 602.8 billion yuan (about $87 billion) in the same period in 2021.

Local financial governments unable to settle the budget

In recent years, China has generally shown a downward trend in local financial self-sufficiency indicators, according to Chinese financial portal Yicai on June 16.

The local budget financial self-sufficiency rate, or the proportion of general government budget revenue to total local government expenditure, is one of the indicators of local financial sustainability.

In terms of the local government budget, it is estimated that in 2022, general expenditure will reach 11.526 billion yuan (about 1.7 trillion US dollars) and revenue will reach 23.1 trillion yuan (about 3.31 trillion US dollars). Putting the local financial self-sufficiency ratio at just under 50%, according to the report.

In economically advanced regions like Shanghai, Beijing, Tianjin, and provinces like Guangdong, Zhejiang, Jiangsu, Fujian, and Shandong, financial self-sufficiency rates are 60 percent or more. At least 22 provinces have rates below 50% and 11 provinces below 40%.

This gap exists in prefectural and municipal areas in western and northeast China and other regions with less developed economies.

These financial authorities, when they are unable to cover the local fiscal budget, will rely on the support of central and higher governments, or on the issuance of LGB.

Liang Ji, deputy director of the public revenue research center at the Chinese Academy of Fiscal Sciences, told Yicai that the overall rate of local financial self-sufficiency had been declining since 1994 and had fallen to its lowest level in 2020. .

The rate of local self-sufficiency in 2022 will continue to contract as the growth rate of tax expenditures outpaces that of revenues, coupled with lower local tax revenues as the business tax has been replaced by a value-added tax ( VAT) in 2014, Liang said. .

Chinese Premier Li Keqiang speaks upon his arrival for the inaugural meeting of the Board of Governors of the Asian Infrastructure Investment Bank (AIIB) on January 16, 2016 in Beijing, China. (Mark Schiefelbein – Pool/Getty Images)

This decision began with a State Council decision announced by Premier Li Keqiang at a meeting in late 2013. Li said that in 2014, rail transport and postal services would be included in the pilot program. collection of VAT instead of business tax. In March 2016, it evolved into a nationwide implementation, covering all taxes in the telecommunications, construction, real estate, finance and service sectors.

However, the new tax strategy led to higher costs in the banking sector and discouraged the development of technical and labor-intensive service industries. It has also led to a deterioration in the operation of transport companies, according to a study by the Taihe Institute, a Beijing-based think tank, on May 17, 2016.

The cost of massive and frequent nucleic acid testing is draining local finances

Since the outbreak of COVID-19, Chinese authorities have adhered to the so-called dynamic zero vaccination restrictions.

In May, China’s Health Care Safety Administration issued a circular saying that the cost of regular nucleic acid testing should be borne by local governments.

This has placed enormous pressure on some debt-ridden districts to reimburse the costs incurred by frequent full-staff nucleic acid testing, although health lawmakers have called in another notice that all provinces and municipalities reduce the cost of testing for a single person to no more than 16 yuan. (about $2.30) and the cost of multi-person mixed testing at less than 5 yuan (about $0.72) per person from June 10.

Based on the official data above, if one tested every person every three days – and China had 900 million urban dwellers at the end of 2021 – the total annual cost of testing would be 540 billion to 1.7 trillion yuan (about $77.5 billion to $246 billion) .

The hidden debts of Chinese cities

In October 2021, Tencent and Securities Daily, two influential Chinese media, co-published the “City Debt Ratio Ranking List” ranking the debt ratio of Chinese cities. published an article on the data.

Among China’s first- and second-tier cities surveyed, 85 doubled their debt ratio in 2021 from 2020, and 75 doubled their debt ratio from 2019, according to the report.

Notably, the statistics do not include hidden liabilities of local governments, of which urban investment bonds are the most important.

China’s urban investment bonds, of which local governments are the implicit guarantors, are issued on the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE) and the interbank market, by investment companies urban, and the funds raised are used for the construction of local infrastructure or public welfare projects.

Urban investment bonds are a unique type of bond for the Chinese communist government. From underwriters to investors and people involved in the bond issuance process, all are considered part of local government bond issuances. In other words, a municipal investment company functions as a financing platform supported by the local government.

In an April 2021 article published on Yicai, Zhao Wei, chief economist of state-owned Kaiyuan Securities, said that by mid-2020, the scale of local hidden debt represented by the interest-bearing debts of platforms urban investment totaled 43.8 trillion yuan (about $6.29 trillion), far more than the explicit debts which totaled 23.9 trillion yuan (about $3.43 trillion); the combined debt ratio is close to 250%, far exceeding the current alarm point.

Moreover, since 2020, urban investment bonds raised to “repay old debts” have exceeded 85%, and interest payments on debt already represent more than 5% of budget expenditures, indicating that debts are intensifying in China, Zhao warned.

jessica mao


Jessica Mao is a staff writer for The Epoch Times and focuses on China-related topics. She started writing for the Chinese language edition in 2009.

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