Growth in Chinese local government debt slowed in 2015

As the data on local government debt in 2015 have been gradually disclosed, journalist of the 21st Century Business Herald outlines the sketch of local government debt for 2015 according to the data set out in bond issuance documents and rating reports published by local governments.

Local government debt growth slowed

As of both the end of June of 2013 and the end of 2014, the balance of government debt of Jiangsu Province ranked the first in China. At the end of 2014, Guangdong Province, though recorded 183.4 billion yuan government debt, was still ranked second to Jiangsu. Since Jiangsu had not seen significant decrease of debt in 2015, it likely remains the province with the largest debt in China.

From the end of June of 2013 to the end of 2014, the balances of debt of all local governments increased significantly, except Chongqing Municipality. Sichuan Province and Guizhou Province witnessed 14.61 percent and 89 percent growth respectively, representing the lowest and highest respectively. The reason is that in the 2014 debt classification work, local governments tended to classify contingent government debt as government debt, which results in the sharp increase in government debt.

In 2015, the growth of government debt slowed noticeably. For 13 provinces available for examination, 9 of them saw slight growth in the balances of debt as at the end of 2015 when compared with that at the end of 2014. Shanxi Province experienced the highest growth of 12.58 percent.

According to the requirement of the Ministry of Finance, local government can only raise new debts through issuance of local government bonds. The slowing of debt growth indicated that quota regulation on local government debt has already taken effect. However, the 21st Century Business Herald learnt that some local governments expanded the debt through alternative measures, such as entering into repurchase agreement, equity with the nature of debt and committing fixed income.

Data also reveals that some local governments cut debts in 2015. The 21st Century Business Herald learnt that the balances of government debt of Jiangsu, Sichuan, Hebei Province and Xinjiang Uygur Autonomous Region declined slightly within 4 percentage points.

The financial department of Sichuan Province indicated that it repaid 33.8 billion yuan existing debt by then through budget layout, project revenue and transfer of public-private partnership. As at the end of 2015, the balance of Sichuan’s government debt was 0.2 percentage points slightly lower than that for the first half year.

Chongqing’s action to reduce debt also caught a lot of attention. Data shows that Chongqing’s debt ratio of 92 percent in 2012 was the third highest in China. In 2015, this ratio decreased to 75 percent, down 17 percentage points. The 21st Century Business Herald previously reported that Chongqing’s measures for the reduction of debt primarily included land transfer, realization of assets and advancement of public-private partnership.

General government debt-to-GDP ratio: about 70 percent

It should be noted that most local governments have not revealed the debt ratios when disclosing the debt data as at the end of 2015. “The balance and quota are what should be compulsorily disclosed according to the requirements of the Ministry of Finance. But debt ratio is not,” an analyst engaged in the rating of local government bonds told the 21st Century Business Herald. “Local governments are relatively cautious about the disclosure of this data, and they are not likely to publicize it if not required.”

Debt ratio is a crucial indicator to measure the local debt risk, which is a value of outstanding obligation divided by comprehensive financial resource. Furthermore, comprehensive financial resource is the sum of public fiscal revenue, transfer payment, governmental fund income as well as income by state-owned capital operation. Up to the end of 2015, the debt ratio of local governments was 86 percent, Minister of Finance Lou Jiwei revealed in the Standing Committee of the National People's Congress last year.

The 21th Century Economic Report calculated based on the said formula that the debt ratio of Liaoning province and Yunnan province surpassed the warning line of 100 percent at the end of 2015 to 157.72 percent and 121.67 percent respectively, with the outstanding obligation of 871,850 million yuan and 622,860 million yuan. It means that the remaining debts of the two provinces exceed their comprehensive financial capabilities. In addition, Guizhou province’s debt ratio recorded 191 percent at the end of 2014, and without related data disclosure, it is unable to calculate that of Guizhou at the end of 2015.

Moreover, Hebei province announced 87.30 percent for its debt ratio at the end of 2015, very close to the warning line. Jiangsu province suffered the largest scale of debts in 2015, but its debt ratio was not high at end of 2015, recording 68.5 percent. In the data sample, Gansu gained the smallest one of 48.58 percent.

Based on the MOF’s previous debt classification, the governmental debts are categorized into general debts and special ones. Partially, general debt repayment mainly relies on public budget income, and that for special debt depends on governmental funds. It finds that general debt of local governments accounted for a high proportion to around 70 percent at the end of 2015, and about 30 percent for special debt.

Currently, due to declines in growth rate of fiscal revenue or even negative growth, the governmental fund income also suffered negative growth, and the fund local governments used for debt repayment reduces along with the rising debt risk. For details, three provinces including Liaoning, Heilongjiang and Shanxi were hit by negative financial growth to -33.4 percent, -10.4 percent and -9.8 percent respectively.

The figures of fiscal revenue recorded -12.1 percent, -12.8 percent and -2 percent respectively for Liaoning, Shanxi and Qinghai province in the first quarter. Their debt ratios will possibly rise at the end of this year, if their fiscal revenues or governmental funds are continuously caught in such situation.

Almost no local government could assess the detailed local debts in the past. No.43 Announcement issued at the end of October 2014 proposed to include the governmental debts as an essential indicator.

“Based on this, governmental organizations and even upper leadership of the Party committee will be certainly informed with the assessment results. Leaders in upper governments will discuss with those in lower ones, or even issue criticism notice, if the indicators including debt ratio do not meet the requirement, which will actively restrict governmental behaviors of blindly borrowing loans,” Qi Shouyin, former head at Department of Finance, Hebei, told the journalist.

(APD/XH FINANCE)