China’s New Funding Model: Keep It Central
Summary
Beijing is taking a bigger role in funding growth after local governments took on too much debt.HONG KONG—China’s central government is ready to load up on debt to help the economy.
Beijing is planning this year to issue $139 billion of ultralong special treasury bonds, a crisis management tool that will now become a regular source of funding, at least for the next few years.
The move will take part of the burden for funding the country’s economic growth away from heavily indebted local governments, some of which are facing severe strain after years of heavy borrowing.
That represents a subtle but significant shift in how China’s economy is managed. The country’s local governments have long played a crucial role, allocating trillions of dollars of resources, greenlighting real-estate projects and new factories, and having the flexibility to experiment with policy changes. But they have also loaded up on debt—creating a financial time bomb that China needs to defuse at the same time as encouraging growth.
“The central government is taking over the role of local governments as the main body of fiscal leverage," wrote analysts at Fitch Bohua, a credit-rating company, on Wednesday.
Chinese Premier Li Qiang outlined the broad details of the plan during a closely watched speech on Tuesday, when he also set an ambitious economic growth target of around 5% for 2024. Li was vague on how Beijing plans to use the proceeds of the special treasury bonds—saying only that the money will be used to implement national strategies and build security capacity in key areas—but several economists said they expect the money to be used in part to support the property sector.
Carlos Casanova, senior Asia economist at Union Bancaire Privée in Hong Kong, thinks a large part of the proceeds of the bond will be transferred directly to local governments.
China has turned to special treasury bonds before, but only in times of turmoil. It issued the bonds in 2007, during the global financial crisis, and in 2020, when Covid-19 was wreaking havoc on the global economy. They now look likely to become a regular plank of Beijing’s economic policy.
Chinese local governments had a total of $5.5 trillion of interest-bearing debt outstanding by the end of 2023, according to financial data provider Wind. But this number includes only publicly disclosed debt, leaving out the huge amounts local governments have kept off their balance sheets.
No one knows for sure how much hidden debt the local governments have, but economists put the number between $7 trillion and $11 trillion. They say between $400 billion and $800 billion of that is at a high risk of default.
The property slowdown is a major cause of the problems facing local governments, since for years they relied on land sales as a major source of revenue. Revenue of local government-managed funds, nearly 90% of which are land sales income, declined 10.1% in 2023, according to official data.
China’s Finance Ministry thinks revenue for these funds will increase 0.1% this year, despite dropping for the past two years. But that target looks too optimistic, according to Ting Lu, chief China economist at Nomura. His team estimates another 10% decline in land sales revenue from 2023.
The real-estate slump hasn’t just reduced revenue for local governments but also forced them to spend more. After the near-collapse of many privately run property developers over the past three years, local governments have taken on the primary responsibility for finishing 20 million units of uncompleted homes in their regions, which could require more than $440 billion of funding.
China is trying to shift the source of economic growth away from the property market and toward industries such as high-tech manufacturing and green energy. That will be a difficult transition to achieve and will require investors to stick around for the long haul. The special bond announcement shows Beijing is willing to lead by example.
“It signals a change in fiscal management," said Peiqian Lu, Asia economist at Fidelity International. “The central government is more willing to spend on long-term investments by expanding its own balance sheet."
Write to Rebecca Feng at rebecca.feng@wsj.com