China’s localities need debt relief, academic says, backing treasury bonds to ease burdens
As China’s local governments suffer under the weight of debt, a former adviser to the central bank has called for treasury bonds to ease the burden
A former adviser to the People’s Bank of China has said the country’s central government should issue more treasury bonds to replace local debt, a call paired with entreaties for deeper reforms to address weak demand ahead of a crucial economic meeting this month.
According to Li Daokui, director of the Academic Centre for Chinese Economic Practice and Thinking at Tsinghua University,
high local debt loads have already dampened economic growth.
Li, who was an adviser to China’s central bank between 2010 and 2012, has also advocated that the central government should shoulder some of the burden weighing down localities, arguing regional authorities have played a critical role in driving the country’s industrial growth.
“25 per cent of the purchasing power in China’s gross domestic product is reflected by local government spending,” Li said at a forum arranged by the state-backed Beijing News on Wednesday.
“The central government should issue treasury bonds on a large scale to replace local government debts,” Li said. “And the short-term debts issued by local governments to fund infrastructure should be extended to 20, 30, 40 and 50 years.”
Li’s views have been echoed by other policy advisers, who have urged long-term fiscal policy reforms and changes in the role of government to make public debt in China more sustainable.
Local government finances have deteriorated significantly, as land sales – a major revenue source –
have declined and years of pandemic prevention measures generated hefty expenses. Their debt piles have grown further thanks to local government financing vehicles (LGFVs), hybrid entities created to skirt restrictions on local government borrowing.
Debt sold by LGFVs was estimated to have reached anywhere from 30 trillion to 60 trillion yuan (US$4.1 trillion to US$8.3 trillion) by the end of 2023 – up to nearly half of China’s GDP. LGFV debt totalled just 1.45 trillion yuan in 2009, according to research published last month by Guotai Junan Asset Management.
Li also expressed concern over declining prices as well as a shortfall in consumption. If there are no reforms to address these problems, he said, China’s growth would decline in the coming years.
But such a change would require officials to alter their perception of what constitutes economic growth and how their performance will be evaluated, Li conceded.
“When governments and leaders meet, everyone is an expert, in technology, major projects and enterprises. They all talk about what kind of technology and projects to focus on, how much these can boost local GDP and how much tax revenue they can collect,” he said. “But few can tell you how much of an increase in disposable income and spending they can expect for ordinary people.”
China’s lacklustre growth, a crisis in the property market, the
spectre of deflation and ageing population have prompted some concerns that the world’s second-largest economy could be on the same path to stagnation Japan walked decades ago.
“For a long period of time, Japan failed to stimulate demand,” Li said, adding the earnings and investment of many Japanese companies suffered as a result.
“I am most looking forward to the coming third plenum, where we will deepen reforms to release consumer demand and guarantee future growth.”
The Central Committee of China’s Communist Party will gather to discuss long-term economic policy in a
major conclave known as the third plenum. It is scheduled to begin July 15 and run for three days.
https://www.scmp.com/economy/china-economy/article/3269336/chinas-localities-need-debt-relief-academic-says-backing-treasury-bonds-ease-burdens?module=top_story&pgtype=section
