China's local governments have been taking new debts to service older ones. Their ability to finance fresh infrastructure projects, therefore, is also diminishing.
As of May 2021, the debt level of the local governments in China stood at $4.16 trillion, the Diplomat noted. Analysts told India Narrative that China’s debt is “well camouflaged” especially since the debt level of the central government is within the acceptable range.
The Diplomat pointed out that “one of the major issues with local government debt is that local governments have been taking on new debt in order to repay old debt, rather than investing in new infrastructure projects.”
Infrastructure projects need a long gestation period before they start yielding results. This has caused financial stress for many local governments.
China’s public expenditure has expanded especially as the country kept fuelling growth amid the Covid 19 pandemic. “The worst impacted are the local governments,” an analyst told India Narrative.
The Diplomat noted that refinancing bonds accounted for about 56 per cent of the newly issued local government bonds, up from 20 per cent in the past two years. “Bonds used for refinancing have crowded out bonds used for infrastructure projects to some extent.”
“Now the rise in debt levels have started bothering the Chinese authorities. China’s economy has been expenditure driven—with large infrastructure projects among other things. Consumer demand — nationally is still not up to the level. That is a worrisome area,” the analyst on condition of anonymity said.
The problem has aggravated due to the Covid 19 pandemic, which led to many countries seeking to restructure their loans which have been fuelling the Belt and Road Initiative besides other infrastructure projects. “It is no secret that many of these countries are in no position to service the loans,” the analyst added.
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Challenges have come up even for the Chinese banks, which have been financing the BRI projects. The South China Morning Post quoting government data noted that Chinese banks had a record high of $ 466.9 billion in non performing assets—loans that turn unproductive.
According to the news organisation chairman of China Banking and Insurance Regulatory Commission Guo Shuqing even warned of a further rise in bad loans this year.
