BOFIT Viikkokatsaus / BOFIT Weekly 2018/36

At the end of July, the central government leadership encouraged local administrators to increase their borrowing, especially to fund infrastructure projects. The message seems to have taken hold. In July and August, local governments issued 1.64 trillion yuan (240 billion dollars) in new debt. Local governments this year have issued bonds worth over 3 trillion yuan, while the value of maturing bonds this year has been less than 400 billion yuan.

A quarter of the new borrowing involves "special-purpose" bonds that local governments may use for acquisition of land or financing road projects. These bonds are to be paid back from revenues from the completed project. The finance ministry this year significantly increased its special-purpose bond quota for local governments to 1.35 trillion yuan (200 billion dollars), while the ceiling on new standard local government bonds was limited to 830 billion yuan. Local governments, under orders from the finance ministry to use their quotas, are rushing to find land acquisition and road construction projects. The finance ministry wants local governments to use 80 % of this year's special-purpose bond quota by the end of September and the rest by the end of October. China's large state-owned banks have already announced plans to increase their investments in local government bonds, most of which are already held by Chinese banks.

China's leadership made reducing indebtedness a main goal of the current five-year plan. In the second half of 2017, infrastructure investment projects already started were put on ice and new projects approvals halted on worries over rising indebtedness and potential project insolvencies. Somewhat ironically, the policy stance has reversed and many new local government infrastructure projects re-authorised.

The exhortations to finance investment projects and support economic growth come in the face of rising uncertainty over rising local government indebtedness. There is no comprehensive estimate of local government debt loads, but China's own estimate puts official debt at about 20 % of GDP as of end-2017. The IMF estimates that local government off-budget financing vehicles amounted to indirect debt obligations at the end of 2017 equal to 24 % of GDP, which put total local government debt at around 45 % of GDP.