Local Chinese Governments struggle with Debt and Growth

Published on Author barrettf17

As China continues to grow, it is unclear how this growth will continue. This can be seen in the borrowing by local governments across China. Since 2010 Chinese debt by local governments has been up 64% and reached a point close to 3 trillion dollars in June of 2013. Much of this borrowing is not coming from traditional sources, almost 40% of this financing came from off the book sources, such as the establishment of shell corporations who take the loans onto their balance sheets rather than those of the local governments.

In order to combat this growing debt, the Chinese national government has recently placed restrictions on how much local governments can borrow. There is hope that by placing these caps, local officials will become more cautious with their spending. Under the new restrictions, it will be difficult for local governments to procure money simply for general spending, instead borrowing will have to be directed at capital expenditures. While these actions may have some negative short term impacts on the Chinese economy (which’s growth is already slowing), the hope is that it will have long term benefits for China on both the local and the national level. As China races towards its full potential, officials are realizing the need for sustainable economic models at all levels of the economy. Hopefully these actions will set a precedent of responsible economic growth in China for the future.

Sources: Articles in Bloomberg and BusinessWeek

2 Responses to Local Chinese Governments struggle with Debt and Growth

  1. I did not realize China was dealing with growing debt. Obviously this has been a major in the U.S. as exemplified by Detroit filing for bankruptcy. I don’t think it is at the same magnitude in China though as it is in some U.S. cities.

  2. Our last book for the term deals with this issue at some length. LGFVs = local govt financial vehicles = the tool to date for such financing. These articles focus on the borrowers, but there are also the lenders, in most cases ultimately banks. So why are banks so eager to lend? What are their alternatives? Meanwhile, google travel blogs on the city of Ordos for a vivid example of LGFV-financed projects.