Singapore, Feb 28, 2023One of China’s biggest economic risks the Chinese leaders will need to tackle is the mounting debt of provinces, Bloomberg has reported. 

A majority of regional governments — at least 17 out of 31 — are facing a serious funding squeeze, with outstanding borrowing exceeding 120% of income in 2022, according to Bloomberg calculations based on available official data. 

According to the Chinese Ministry of Finance, that’s the threshold to indicate disproportionately high debt risks.


Tianjin, one of the four Chinese municipalities, known for its port and massive overdevelopment, faces the biggest threat, with debt almost three times as large as its income, the report said. 

Bloomberg says the financial crunch has several implications for the economy. While it’s unlikely that any regional government will default, the high debt levels may force some to scale back spending and push the central government to spend more. 

It could also prompt the People’s Bank of China to keep interest rates low to keep the repayment burden for provinces under control, the report says.

“Rising debt levels imply higher debt repayment and servicing costs for local governments and limit their room for fiscal stimulus amid falling return on capital,” said Lisheng Wang, an economist at Goldman Sachs Group Inc as quoted by Bloomberg.

Wang said the PBOC will likely keep policy rates on hold this year, partly due to the rapid government debt expansion, as well as other reasons, such as uncertainty about the economy’s outlook and still-mild inflationary pressure.

A broader measure of government income contracted last year for the first time since at least 2012 due to Covid disruptions, the property slump, and record tax breaks, while spending rose by 3%. 

The fiscal deficit surged to a record, forcing the government to sell a record number of new bonds to help finance the shortfall, taking the outstanding official debt to over 35 trillion yuan ($5 trillion).

Bloomberg says that total doesn’t include off-balance sheet borrowing via local government financing vehicles, which provinces use to help finance their spending needs. This “hidden” debt could be more than twice as big as official local liabilities, according to Guosheng Securities Co. analyst Yang Yewei.

As debt has risen so has the repayment burden for local governments. They repaid 3.9 trillion yuan in bond principal and interest payments last year just on their official debt and much more on their unofficial borrowings.

China’s top leaders have stressed the importance of fiscal sustainability and keeping local debt risks in check.

Beijing is considering setting a special bond quota of 3.8 trillion yuan this year, less than the actual issuance in 2022, Bloomberg News has reported, Chu said more indebted regions might get a smaller share.

Tax breaks could be scaled back as well, with the finance minister warning earlier this month that fiscal revenue growth “won’t be too high” despite a low base of comparison from last year.

Bloomberg says one option to plug the funding gap, according to economists, would be for the central government to borrow more and increase its transfers to the regions, thereby reducing the need for local governments to take on extra debt. 

Also, the government could call on state policy banks, like China Development Bank, to spend more, similar to an investment of 740 billion yuan the lenders made last year under one of their programs, Bloomberg has reported.

Economics also suggests that lower interest rates could also cut financing costs for local governments and improve their spending power.