Central Local Governments Warn of 'Debt Bomb'... Paid Interest of 1 Trillion Yuan

First Since 2015 Reader Local Bond Issuance Approval
123% Surge in 4 Years
"This Year Also Increasing Bond Issuance Relying on Infrastructure Investment"

[Asia Economy Beijing=Special Correspondent Kim Hyun-jung] Due to the rapid increase in debt caused by COVID-19 response and economic stimulus measures, the interest paid on local government bonds in China last year exceeded 1 trillion yuan. As China is expected to rely on infrastructure investment to rebound its growth rate, the ballooning debt bomb is emerging as the biggest risk to the Chinese economy.

On the 30th, Chinese economic media Caixin (財新) reported, citing the Ministry of Finance's announcement the day before, that the interest payments on local government bonds in China last year reached 1.1211 trillion yuan (approximately 204.69 trillion won). This is the first time annual interest payments have exceeded 1 trillion yuan since the Chinese government allowed local governments to independently issue local bonds in 2015. Compared to last year's payment (928 billion yuan), it increased by 20.8%, and compared to 2018 (503.7 billion yuan), it surged by 122.5%.

[Image source=Yonhap News]

The scale of debt also grew like a snowball. Last year, the total bond issuance by local governments was 7.37 trillion yuan, slightly down from the previous year (7.49 trillion yuan), but this year it is widely expected to exceed the record high of 7.5 trillion yuan. Meanwhile, the amount of bonds maturing this year alone reaches 3.67 trillion yuan. According to data released last year by the National Institute of Financial Development (NIFD) under the Chinese Academy of Social Sciences, the debt-to-GDP ratio in China as of the third quarter was 273.9%, up 0.8 percentage points from the previous quarter (273.1%).

According to Hong Kong's South China Morning Post (SCMP), asset management company Thunder Fund recently stated in an investment memo that "China will continue to rely on infrastructure spending to stabilize the economy," and predicted that "local government bond issuance will increase to over 7.5 trillion yuan this year." Thunder Fund added, "Special purpose bonds worth 4 trillion yuan were issued last year for construction projects," and "many projects still require fiscal support, and the total bond amount needs to be maintained at a certain level."

On the other hand, local governments are facing worsening fiscal conditions as profits from land sales sharply decline due to the real estate market slump, while providing tax benefits such as tax reductions to enterprises under their jurisdiction for COVID-19 response in accordance with central government guidelines. Some central and western regions have openly mentioned the burden of debt. Han In-hyun of Angang City, Shanxi Province, adjusted the budget last October, stating, "There is significant pressure on debt and interest repayments," and issued refinancing bonds worth 111 million yuan to repay debt and interest. Even after that, about 40 million yuan remains unpaid.

[Image source=Reuters Yonhap News]

The global financial market has consistently warned about the risks of China's debt problem. Swiss financial group UBS recently emphasized, "The possibility of a hard landing in China's real estate market, capital outflows following currency depreciation, and slow progress in structural reforms are among the major risks China must address," adding, "Moreover, excessive stimulus policies have increased debt in local governments and state-owned enterprises, which could shock the market."

Chinese credit rating agency Chengxin International forecasted that the issuance of new special purpose bonds by local governments will remain high this year, stating, "The profitability of special purpose bond projects is already low and is further declining," and diagnosing, "To avoid default risks under fiscal pressure, it is necessary to improve the debt correlation guarantee mechanism."

Meanwhile, China's national fiscal revenue last year was 20.37 trillion yuan, increasing by only 0.6% compared to the previous year. Among this, tax revenue recorded 16.67 trillion yuan, down 3.5% due to the impact of COVID-19.