From: lessgovt@gmail.com   
      
   China’s Colossal Hidden-Debt Problem Is Coming to a Head   
   By Wall St. Journal, Dec. 5, 2023   
   China is trying to defuse a financial time bomb that could severely damage its   
   banking system.   
      
   Cities and provinces across the country have accumulated a massive amount of   
   hidden debt following years of unchecked borrowing and spending. The   
   International Monetary Fund and Wall Street banks estimate that the total   
   outstanding off-balance-sheet    
   government debt is around $7 trillion to $11 trillion. That includes corporate   
   bonds issued by thousands of so-called local-government financing vehicles,   
   which borrowed money to build roads, bridges and other infrastructure, or to   
   fund other    
   expenditures.    
      
   No one knows what the actual total is, but it has become abundantly clear over   
   the past year that local governments’ debt levels have become unsustainable.   
   China’s economic growth is slowing and the country is battling deflationary   
   pressures that    
   will make it harder for local governments to keep up with their interest and   
   principal payments.   
      
   Economists say a significant chunk of the hidden debt—their estimates range   
   from $400 billion to more than $800 billion—is particularly problematic and   
   at high risk of default.    
      
   Chinese authorities have realized that the risks to the country’s financial   
   stability and overall growth have become too large to ignore. They are trying   
   to tackle the problem more systematically and are starting to swap out some   
   hidden debt for new—   
   and explicit—government debt.    
      
   The big worry is that a wave of defaults could spread losses far and wide.   
   That could quickly snowball into a nationwide financial crisis if credit   
   markets seize up and retail and corporate depositors start to get worried   
   about the financial stability of    
   banks that hold a lot of local-government bonds.    
      
   “Once a local-government financing vehicle defaults, the situation can   
   easily get out of hand,” said Yao Yu, founder of YY Rating, an independent   
   Chinese credit-research firm. Bonds from local-government financing vehicles   
   make up close to half of    
   China’s domestic corporate bond market, according to Wind data, and defaults   
   could choke off funding for other borrowers if many investors and bond buyers   
   back away.    
      
   In early November, China’s central government said it places “great   
   importance to the prevention and resolution of the risk of hidden debts of   
   local governments.” Bankers and local government officials were also warned   
   that they would be held    
   accountable for life if they raised new hidden debt.   
      
   Pan Gongsheng, the governor of the People’s Bank of China, said at a Beijing   
   financial forum last month that the central bank would also provide emergency   
   liquidity support to regions with relatively high debt burdens. He said   
   China’s total    
   government debt isn’t high by international standards and that the country   
   is taking steps—including asset disposals and refinancing debt—to mitigate   
   the risk posed by its local-government debt.    
      
   Moody’s Investors Service on Tuesday lowered its outlook on China’s credit   
   rating to negative from stable, because the country is likely to provide more   
   support to financially stressed local governments and state-owned enterprises.   
   The credit-rating    
   company also cited risks to China’s economic growth. Moody’s rates China   
   A1, an investment-grade rating that is four notches below its top triple-A   
   rating.   
      
   China has muddled through a yearslong property bust and dozens of real-estate   
   developer debt defaults without massive losses to the country’s banks. That   
   is largely because many property developers had raised money offshore by   
   selling bonds to    
   international investors and were less dependent on bank loans.   
      
   The situation is different for local-government financing vehicles. Most of   
   their bonds are held by Chinese commercial banks, which also extended loans to   
   them. A recent UBS report said domestic banks’ total exposure to   
   local-government financing    
   vehicles at the end of last year was equivalent to about $6.9 tr   
   llion—representing about 13% of the banking sector’s total assets.    
      
   For more than a decade, Chinese regulators have been trying to address the   
   risks of the country’s hidden debt. The last round of major efforts occurred   
   between 2015 and 2018. During that time, Chinese local governments also sold   
   new public bonds to    
   swap out their hidden debt, effectively giving the latter explicit government   
   backing.    
      
   China’s Finance Ministry also told local governments to borrow more   
   responsibly in the future. However, under pressure to stimulate growth, local   
   governments went on another borrowing spree, and by the end of November, the   
   outstanding bonds of their    
   financing vehicles ballooned to more than twice what it was in 2018, according   
   to Wind, a financial data provider.   
      
   Some cities and provinces are starting to show financial strains after a   
   brutal property downturn caused local government income from land sales to   
   plunge. Three years of heavy spending to contain the Covid-19 pandemic has   
   also depleted their cash    
   coffers.    
      
   In late 2022, Zunyi Road and Bridge Construction Group, a state-owned company   
   that builds bridges and roads in debt-laden Guizhou province, extended the   
   maturity of approximately $2.2 billion of bank loans by 20 years.    
      
   In May, a utility provider in the capital city of the financially weak Yunnan   
   province repaid its domestic notes a day after their due date. And in October,   
   a state-owned tourism group in Weifang, a city in China’s eastern Shandong   
   province, missed $14    
   million in payments on nonpublic debt.    
      
   “In a lot of economically weaker regions and provinces, we’ve seen near   
   misses and the last-minute scrambling to repay public bonds. It’s attracted   
   more attention from the government to help alleviate these immediate liquidity   
   problems,” said    
   Chris Yip, a credit analyst at S&P Global Ratings.   
      
   There has been an urgent push for local governments to issue so-called special   
   refinancing bonds to replace some of their off-balance-sheet debt.    
      
      
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