Local Chinese debt—borrowing by provinces, counties, and townships—has grown 67% since 2010, faster than the 40% growth of the national economy during the same period. On December 31st, UBS Securities’ chief China economist Wang Tao described this rate as “alarming,” a day after the National Audit Office released a report tacking this debt at USD 2.96 trillion (RMB 17.9 trillion). These numbers include borrowing from nonbank lenders (some 10000 shady financial vehicles set up to dodge direct borrowing limits) and borrowing by some public corporations (called “contingent liabilities,” which have topped USD 1.15 trillion (RMB 7 trillion), up 75% since 2010).
However, like the US, the central Chinese government neither includes these numbers in its national budget, nor is it legally liable for their repayment. In fact in the US, nine states defaulted on credit obligations during the 1840s, but most of those states eventually repaid all of their creditors. The primary concern for China is not just localities defaulting on their loans, but rather slower future growth of government revenues and higher interest rates, which could make it harder to fight inflation.
The National Audit Office acknowledged the “potential risks” of rising debt, and that the current pace is “not sustainable.” Comparisons have been drawn to the “lost decade” of Japan in the 1990s which followed a period of rising debt. Avoiding such a fate, according to a report from JPMorgan Chase & Co., is contingent on China’s ability to readjust growth targets, boost local revenues, and discourage lending to poorly-managed local governments. Later this year, municipalities will begin issuing special bonds to repay these loans, and increases in property and consumption taxes are being considered.