Until recently, Chinese cities have had no issues borrowing money to finance their myriad building and development projects. The city of Wuhan, the capital of the Hubei Province, may be foreshadowing coming changes to the nearly unlimited access to financial resources that many Chinese cities have enjoyed for the last decade or so. The city has borrowed millions to fund development of its infrastructure and transportation network, but has run into major problems as concern has arisen over a potential default on the cities loans.
Chinese debt has risen substantially in recent years, especially on the local level. Local-government debt will likely shoot to record heights by 2019, reaching 52% of the GDP. This debt is held by local-government financing companies, which have been used by City Halls ever since they were banned from doing so themselves by Beijing. Such high levels of debt have preceded major recessions in Japan and the United States before, and officials and investors have become concerned about the future of Chinese economic growth.
Many cities have begun to struggle with their credit in the wake of such high levels of debt. The credit ratings of the cities borrowing agencies has skyrocketed, and there is now some contention that cities may begin to default on their loans. In response, many of the financing companies have attempted to obtain funds through equity-swaps. This measure, while effective at assisting these companies obtain proper credit levels, is merely a band-aid on the problem, and does not solve the long term problem of soaring borrowing levels.
Development rages on in China, but the question that has arisen is one of sustainability. Will local governments be able to repay their debts in coming years, or will the cycle of restructuring borrowing institutions to obtain more and more credit continue until default occurs, and Beijing is forced to confront the problem that has been developing in cities across the nation.
Source: Wei, Lingling, and Bob Davis. “Debt That Once Boosted Its Cities Now Burdens China.” WSJ. The Wall Street Journal, 28 Jan. 2015. Web. 29 Jan. 2015.
Our third book (Miller) and fourth (Adams & Ma) both address this issue. See to the actual IMF report, available from their web site [link in the blogroll at right]. Oh, and for Wuhan it’s billions not millions, right?
The central government is trying to get a better grasp of the problem. As our readings will indicate, what is “government” has been ambiguous, with nebulous “local govt financial vehicles” (LGFVs) as central players.