China targets trillions of dollars in ‘hidden debt’
Budget czar Li to comb local government books amid borrowing binge and property collapse
How do you get to the bottom of China’s Everest-like debt mountain? Find a sucker to go through the books of local governments across the country. It is a titanic task, but that is what awaits veteran budget inspector Li Dawei, who will head a new Communist Party department.
As the boom years of the past four decades morphed into a bust, the tsunami of red ink started flooding the world’s second-largest economy. Last year, The Wall Street Journal estimated that total “hidden debt” was as high as US$11 trillion.
The roots of the fiscal disaster can be traced back to 1994 and sweeping tax reforms. Huge chunks of revenue were gobbled up by Beijing, forcing provincial administrations to rely on land sales and borrowing. The 2020 crash popped “the greatest property bubble” in history.
“Trillions in hidden debt drove China’s growth. Now it threatens its future. Local governments racked up as much as $11 trillion in off-the-books debt to build industrial districts, transit systems, and housing projects, including many that failed,” The Wall Street Journal said.
Big squeeze:
- Earlier this year, the South China Morning Post pointed out that local administrations urgently needed an injection of cash as they grapple with loan repayments,
- Land sales and VAT income have dried up at a time when the broader economy faces anemic domestic demand, evaporating household wealth, and stagnating wages.
Delve deeper: Still, “the key question is whether the debt control office has the enforcement powers and the expertise to rein in local governments,” James Palmer, deputy editor at Foreign Policy, wrote in today’s China Brief newsletter.
Between the lines: “After Xi slashed their salaries, many skilled financial regulators left for the private sector. Local government finances are [also] notoriously messy, with debts often hidden from central authorities,” he said.
Big picture: The ruling Communist Party’s obsession with secrecy and the lack of independent organizations illustrate a chronic transparency issue that percolates throughout China. These opaque practices also have devastating global implications.
Bottom line: As The Economist reported in September, “the Chinese authorities are concealing the state of the economy, hinting that “the Communist Party’s internal information systems may also be flawed.”
China Factor comment: In the end, unraveling the scale of the debt crisis will be as horrifying as finding the right pieces in a giant Jackson Pollock-inspired jigsaw puzzle. Abstract but alarming.