BOFIT Weekly Review 2015/18
Indebtedness of local governments continues to soar
Preliminary figures released last week put the debt of local governments at the end of 2014 at around 16 trillion yuan (€2.3 trillion), or approximately a quarter of GDP. Figures from mid-2013 put local government debt at 10.9 trillion yuan, which translates to a rise of around 33 % a year.
The high growth may in part reflect the fact that some of the local government loan guarantees have been reclassified as their direct debt. In addition to their own borrowing, local governments are indirectly responsible for a smaller amount of loan guarantees (although no information for end-2014 has yet been released). The total amount of liabilities at end-2014 is thought to be around 20 trillion yuan (€2.9 trillion), up from 17.9 trillion yuan in mid-2013.
Local governments can now seek relief from debt problems in the bond markets. In March, the government allowed local governments to issue a total of 1 trillion yuan in bonds to pay off high-interest loans held by local government financing vehicles. Investors apparently have not found the low yields on these new bonds very attractive. Commercial banks are the biggest investors in Chinese bond markets. Market information suggests that the PBoC is currently planning an arrangement to allow banks to swap debt purchased from local governments for central bank loans.