China: Authorities closing in on local-government implicit debt – Standard Chartered

Standard Chartered analysts point out that the China’s central government is conducting a new investigation into local governments’ total debt on concerns that their implicit debt is picking up again.

Key Quotes

“We estimate that non-government entities owed CNY 45tn of debt as of end-2018 for the provision of public goods and services (the reason for most local-government implicit debt). Our estimate includes borrowings by local government financing vehicles (LGFVs), SOEs and SPVs under the public-private partnership (PPP) model.”

“We also include private equity investment via special construction funds (SCFs), government guided infrastructure funds (GGIFs) and SPVs as debt, as local governments often promise buybacks and fixed investment returns to attract private investors.”

“We calculate CNY 10tn of full-obligation implicit debt at local governments as of end-2018, based on our estimate that 30% of new non-government debt raised for public projects from 2015-18 (CNY 34tn) will become local government full-obligation debt, as indicated by the 2013 audit result. Our calculation suggests total explicit and implicit local-government debt of CNY 28.4tn at end-2018, equivalent to 31.5% of GDP.”

“The central government will likely recognise full-obligation local-government implicit debt of CNY 5tn for 2019-20. We believe the smaller (than our estimated) amount would prevent the local-government debt ratio from breaching the 100% threshold for risk management and also likely reflects local governments’ reduced off-budget borrowing since the implementation of the revised Budget Law in 2015. New debt swaps are likely to be approved for local governments.”