China Bold Move to Curb Debt: China has taken a decisive step to rein in its local government debt by instructing authorities to halt public-private partnership (PPP) projects deemed “problematic.” This move comes as part of a broader effort to curb municipal debt risks and follows a recent surge in concerns about the impact of escalating local government debt on the country’s economy.
The guidelines, outlined in a cabinet document circulated among local governments, policy banks, and state lenders last month, mark a comprehensive reform of the PPP model since its inception in 2014. The State Council’s move reflects growing apprehension over the surge in local government debt, which reached 92 trillion yuan ($12.6 trillion), equivalent to 76% of China’s economic output in 2022.
To address these concerns, Beijing is scrapping a regulation that allowed local governments to allocate up to 10% of their annual public budget expenditures to PPP projects. Instead, a more stringent vetting mechanism will be implemented, involving government authorities’ review of each project. This change aims to prevent further debt accumulation and eliminate the potential misuse of funds.
The State Council has also instructed local governments to halt projects identified as “problematic” in inspections conducted by the National Audit Office earlier this year. These problematic projects often involved irregularities, including instances where local government financing vehicles posed as the “private” partner, leading to excessive debt accumulation.
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In addition to these measures, all PPP projects that have not completed the bidding process to find partners by February this year will be suspended. Since 2014, Beijing has promoted the PPP model to attract private investment into public infrastructure projects, intending to boost capital investment while alleviating the burden on debt-laden local governments.
However, the PPP boom raised concerns as some local governments used these partnerships as channels to raise debt, prompting authorities to reevaluate the model. Debt-laden local governments represent a significant risk to China’s economy and financial stability, particularly amid challenges like a property crisis, over-investment in infrastructure, and pandemic-related costs.
As part of broader efforts to address local government debt, China has instructed state-owned banks to extend existing debt with longer-term loans at lower interest rates. The recent guidelines indicate a shift in oversight for PPP projects from the finance ministry to the National Development and Reform Commission (NDRC).
China’s move to minimize economic risks associated with local government debt underscores its commitment to fiscal responsibility. Municipalities are now encouraged to issue special-purpose or general bonds to repay debt linked to PPP projects. This decisive approach aims to ensure a more sustainable and responsible fiscal strategy as China navigates complex economic challenges.
Our Reader’s Queries
Why is China reducing US debt?
According to one theory, China may be selling Treasurys to bolster the yuan. This tactic allows them to quickly acquire U.S. dollars, which they can then use to purchase their own currency on the global market. This artificially inflates the value of the yuan.
Which country has highest debt?
Japan holds the top spot with a national debt that has been above 100% of its GDP for the past 20 years. In 2023, this debt reached a staggering 255%.
Is China in trouble financially?
For years, China’s mounting debt has been a major cause for concern. As the economy has grown, so too has the debt, although it’s worth noting that the overall debt levels are comparable to those of other major economies like the United States and Japan. Despite this, the issue remains a pressing one that requires careful attention and management.
What is the China’s 1 trillion yuan debt plan?
In a surprising move, the Chinese government announced in October that it would be releasing an additional 1 trillion yuan ($141 billion) in sovereign bonds during the fourth quarter. This decision was made in order to fund infrastructure spending, but it will also result in a wider budget deficit as a percentage of GDP for 2023. In fact, the deficit is expected to reach a record high of 3.8%. This move is a rare one for the Chinese government, and it will be interesting to see how it plays out in the coming months.