China finding it difficult to service debt

China’s local governments are finding it difficult to service debt raised via municipal and Local Government Financing Vehicles (LGFVs) bonds, as their fiscal position has become tight due to the slowing economic growth and fall in revenue receipts amid a downturn in the property market.

According to S&P Global Ratings analysts, local government direct debt exceeded 120 per cent of revenue in 2022. As per the IMF, the explicit on-the-books debt of local governments, including bonds, was USD 5.3 trillion. However, implicit debt, including LGFV debt, amounted to USD about 15.3 trillion.

In the next five years, municipal bonds worth almost USD 2.1 trillion (40 per cent of their outstanding debt) are to mature. Along with the maturing municipal bonds, there is an increasing debt burden of bonds sold by LGFVs, which are off-balance platforms. About USD 790 billion worth of onshore bonds of LGFVs are coming due this year, the highest since 2021.

A potential bond repayment default could undermine the country’s economic recovery and threaten its financial stability. As per economists, China’s high level of municipal borrowing would be the largest financial risk this year. A recent last-minute bond payment in Kunming, the capital of Yunnan, by a local government-owned firm points towards weakening the debt serviceability of local governments.