China’s Local Government Debt:
Issues and Concerns
Professor Ho-Mou Wu
National School of Development,
Peking University
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Issues and Concerns
• How bad is the local-government debt (LGD) problem
in China?
• How does the LGD problem contribute to the risk faced
by China’s economy?
• Can China resolve the LGD problem while facing a
slowing economy in 2012 and beyond?
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Total Size of LGD
• Type I: the government bears the responsibilities of
repayment
• Type II: the government bears the responsibilities of
guarantee
• Type III: the government may have to take the
responsibility of rescue
Total: 10.717491 trillion yuan
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The Size of LGD
Total size: 10.717491 trillion RMB (26% GDP, 2010)
Data: National Audit Office of China, 2011
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Accumulation of LGD
70%
60%
50%
40%
30%
20%
10%
0%
Data: National Audit Office of China, 2011
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All Levels of Governments have LGD
Data: National Audit Office of China, 2011
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Regional Distribution of LGD
Data: National Audit Office of China, 2011
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Who owes the money?
Data: National Audit Office of China, 2011
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Local Government Funding Platforms
• Definition: Local Government Funding Platforms (LGFPs) are
legal entities founded by local governments and its subsidiaries
by means of financial appropriation or asset injection (such as
land, equity, etc.), specializing in funding, investing, constructing,
and operating public or quasi-public projects commissioned by
local governments.
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Causes for Emergence of LGFPs
• Since the reform of tax-sharing system in 1994, financing
capacity of local governments is significantly constrained.
• In the Budget Law of 1994, local governments are prohibited
from issuing local government bonds, except as otherwise
prescribed by laws or the State Council.
• As a result, LGFPs came into being to provide finance for local
infrastructure construction, and to boost economic growth. At the
end of 2010, there were 6,576 LGFs.
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Financing Modes of LGFPs
• 1. Bank loans: to apply for commercial bank loans collateralized with assets
(usually the rights to the use of land) and generally guaranteed by local
governments.
• 2. Cooperation between trust companies and banks: guaranteed by local
governments, commercial banks and trust companies cooperate to issue trust
financial products, and then loan to LGFPs by trust companies.
• 3. Financial products of banks: guaranteed by local governments, commercial
banks issue financial products and loan to LGFPs.
• 4. Cooperation between local governments and trust companies: guaranteed
by local governments, trust companies issue trust products and loan to LGFPs.
• 5. Issuance of quasi-municipal bonds: guaranteed by local governments,
LGFPs issue corporate bonds to finance municipal infrastructure construction.
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Who Lend the Money?
Type of creditors
7.06% (0.7567
trillion yuan)
9.75% (1.0450
trillion yuan)
Bank loans
Finances from higher
authorities
Bond issuing
4.18% (0.4478
trillion yuan)
Borrowings from
other units and
individuals
79.01% (8.4680
trillion yuan)
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Repayment Tension in the Coming Years
uint: 100 million yuan
Year for debt
repayment
Total of 3 types of
debts
Type I
Type II
Type III
Debt volume
Ratio
Debt volume
Ratio
Debt volume
Ratio
Debt volume
Ratio
2011
26246.49
24.49%
18683.81
27.84%
3646.24
15.60%
3916.44
23.46%
2012
18402.48
17.17%
12982.52
19.35%
2972.07
12.72%
2447.89
14.66%
2013
12194.94
11.37%
7991.36
11.91%
2265.98
9.70%
1937.60
11.61%
2014
9941.39
9.28%
6177.01
9.20%
2273.31
9.73%
1491.07
8.92%
2015
8012.26
7.48%
4934.69
7.35%
1780.66
7.62%
1296.91
7.77%
2016and
beyond
32377.35
30.21%
16340.12
24.35%
10431.48
44.63%
5605.75
33.58%
Total
107174.91
100.00%
67109.51
100.00%
23369.74
100.00%
16695.66
100.00%
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Scale of Bank Loans to LGFPs
• Statistics of CBRC shows that as of Jun, 2010, the loan balance of
LGFPs is RMB 7.66 trillion, in which 1.8 trillion (24%) can be covered
by cash flow of the funded projects; 4 trillion (52%) has to rely on
second repayment sources (mainly land-transferring fees); and 1.86
trillion (24%) has severe default risk.
52%
24%
Payable Debts
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24%
Rely on Second Repayment Sources
High Risk Loans
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LGD Adds to China’s Debt Burden
 China’s general government gross debt 2010: 13.46364 trillion
yuan (Source: World Economic Outlook. Sep, 20th, 2011)
 Chinese government’s total debt/GDP 2010:
=(13.46364+10.71749)/40.1202
=60.27%
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Risks Associated with LGD
• 1. Lack of monitoring channel for local government debtraising and usage.
• The budgetary control system was not implemented in many local
governments.
• Uncertain statistics in debt size and repayment responsibilities in
some places.
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Risks Associated with LGD (Cont’d)
• 2. Inefficient Corporate Governance. Top management of many
LGFPs is often appointed by local government, lacking sufficient
management competency and risk consciousness.
• 3. Over-reliance on Land Transferring Fees.
- Bank loans to LGFPs are generally guaranteed by local
governments.
- The guarantee is based on expectation of rising land
transferring prices.
- If land price drops, it is difficult to repay bank loans, and the
local government has to appropriate other financial funds.
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Recent Rules and Regulations on LGFPs
• On Jun, 10th, 2010, the State Council promulgated “Circular on relevant
issues Concerning Strengthening the Administration on LGFPs” , to
comprehensively plot management of LGFPs.
• On Jul, 30th, 2010, MOF, NDRC, PBC, and CBRC promulgated “On
Implementing Circular from State Council on Strengthening Management
of LGFPs”, which required local finance authorities report debt clearance
and verification of LGFPs before Oct, 31st, 2010. It also requires new
LGFPs established after Jul,1st, 2010 pay up capital and prohibits the
injection of welfare fund-related assets as capital.
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Recent Rules and Regulations on LGFPs (Cont’d)
• On Nov, 10th, 2010, CBRC promulgated “Notice on Verification of Loans
Ledger to LGFPs” to commercial banks, planning to conduct dynamic
management of LGFPs.
• On Nov, 20th, 2010, NDRC promulgated “Circular on Relevant Issues on
Further Disciplining Bond Issuance of LGFPs”, which stipulated that
repayment funds of LGFPs that issue corporate bonds should be no less
than 70% of its retained earnings, and LGFPs are prohibited to issue bonds
if the debt level of the reference local government exceeds100%.
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Recent Rules and Regulations on LGFPs (Cont’d)
• In Dec, 2010, CBRC promulgated “Guiding Opinions of Strengthening
Management of Credit Risk of LGFPs”, specifying risk weights, provision
coverage requirement as well as classifications of loans to LGFPs.
• Starting in July, 2011, new financing by LGFPs has been prohibited.
• On Oct, 20th, 2011, the State Council allowed Shanghai, Shenzhen,
Zhejiang, and Guangdong to issue local government bonds. Shanghai
raised 7,100 million yuan successfully on Nov, 16th, 2011.
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Prospects
• China needs to strengthen fiscal discipline on government
expenditures at all levels.
• China needs to reconsider the sharing of tax revenues among the
central government and local governments.
• May allow more local governments to issue bonds so as to impose
market discipline and budgetary control on local governments.
• About 1.8-2.5 trillion yuan LGD may become bad loans for
China’s banking system.
• The central government may step in as the LGD problem
worsens.
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