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Local Governments’ Illegal Debts Highlight Fiscal Strain on China

China’s Ministry of Finance disclosed eight cases of illegal debt held by local governments, highlighting the seriousness of local debt issues facing the country. Since 2018, local governments have violated national-level policy by forcing state-owned enterprises and banks to advance billions of yuan in funds for urban development, infrastructure projects, and other expenditures that should have been funded by municipal or provincial budgets instead. This has created tens of billions of yuan in “hidden debt” in certain cities.

Examples include Hubei Province’s creation of 21.48 billion yuan (US$2.95 billion) in hidden debt through land development projects, Guangxi Province’s 17.7 billion yuan (US$2.43 billion) of debt for land projects, and Shaanxi Province’s 2.6 billion yuan (US$360 million) for a conference center. Other cases involved hundreds of millions of yuan in illegal advances for flood relief and other spending.

Banks were found complicit in the practice, with the Agricultural Development Bank of China’s Shaanxi branch illegally providing 1.3 billion yuan (US$180 million) that went toward river management projects in Xi’an. The Agricultural Bank’s Wuhu branch was found to have illegally loaned 471 million yuan (US$64.7 million) to the local government.

China’s Finance Ministry released information about these cases to hold local officials and banks accountable and warn others against engaging in the practice. The release highlights the financial difficulties faced by local governments, where even basic infrastructure and public works spending has required procurement of illegal hidden debt, typically via shell companies owned by the local government.

Beijing’s attempt at introducing accountability through publicity will likely be insufficient to resolve the issue absent more comprehensive reforms.

Source: Central News Agency (Taiwan), November 6, 2023