jfid – China has instructed heavily indebted local governments to postpone or halt several state-funded infrastructure projects.
While Beijing grapples with debt risks, it strives to stimulate the economy.
In an effort to manage the $13 trillion local debt, the China State Council has recently directed local governments and national banks to delay or stop the construction of various projects with less than half of the investment plans completed in 12 regions nationwide.
As Beijing tightens debt restrictions in recent months to mitigate risks to the world’s second-largest economy and financial stability, it aims to boost growth traditionally reliant on local government infrastructure investment.
The latest directive targets previously unreported infrastructure projects, including toll roads, airport reconstruction and expansion, and urban railway projects, according to an undisclosed source. Some projects, such as those approved by the central government or affordable housing projects, are exempt.
All information is sourced from an anonymous insider who requested confidentiality due to the secretive nature of the directive.
The State Council Information Office, responsible for media inquiries for the cabinet, did not respond to requests for comment, as reported by Reuters on Saturday, January 20, 2024. In October, the council limited the borrowing capacity of local governments in 12 regions and restricted state-funded projects they could launch.
Subsequently, they ordered local governments to halt problematic public-private partnership projects and imposed further investment restrictions in November.
Two sources revealed that this new directive provides a more detailed list of infrastructure projects that governments should avoid, with one stating that the government must scale back investment in various projects with completion rates above 50 percent.
China’s top leaders emphasized the need to coordinate and address risks arising from real estate, local debt, and small to medium-sized financial companies in December, as reported by government media. Beijing is concerned about the potential for default due to significant local government debt and weaker growth prospects.
China’s local government debt reached 76 percent of the gross domestic product in 2022, up from 62 percent in 2019 and surpassing the central government’s debt of 21 percent.
Concerns about local government debt were triggered by plummeting property prices and a cash crisis, making developers unable to purchase more land—their primary source of income—while reducing options to raise funds amid slowing growth.
China’s economy grew by 5.2 percent in 2023, slightly above the official target but far worse than the estimates of many analysts, burdened by increasing local government debt and worsening property crises.
The State Council targeted indebted regions, including Liaoning and Jilin provinces bordering North Korea, Guizhou and Yunnan in the southwest, and the cities of Tianjin and Chongqing. These regions must make every effort to reduce debt risks to low and medium levels, although the directive does not specify how debt reduction will be measured.
