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Just how large is China’s ‘hidden’ debt pile? Beijing orders native cadres find out

Lower-level authorities told to assess the degree of back-door funding and suggest methods to deal with the menace 

China’s ruling Communist party and its ministers have ordered the local administration to prevent accumulation of “hidden” debt as a part of Beijing’s larger push to avoid a crisis in money markets.

The order was sent to municipal governments throughout the country, as per official reports of cadres meeting to review and evaluate the threat.

The full text of the order has been kept confidential however the official Hunan Daily reported on 16 Aug 2018, that provincial governor Xu Dazhe ordered cadres “to follow requests from the central leadership for a better estimate of hidden government debt immediately so as to lay down plans to mitigate its ill effects on the economy at large”.

Officials in Jingzhou and Yunxi county in Hubei province conjointly the county of Kangle in Gansu province also met to study the directions, reports on government websites said.

Zhao Quanzhou, a senior financial researcher working with the Ministry of Finance’s Chinese Academy of fiscal Sciences, said the debt curbs were an attempt to cur leverage within the Chinese economy, listed by President Xi Jinping as the country’s outweighing economic priority.

“The order is meant to rein in hidden debt and pave way for generating mitigating efforts in the near future,” Zhao aforesaid.

Simultaneously, the ministry has told local administrative authorities to sell bonds quickly to boost funds for expanding on infrastructure.

Chinese lawmaker Yin Zhongqing“Speeding up the process of issuance of special bonds to open a wider front door to financing” whereas China slowly closes the rear door to illicit fundraising, Zhao said.
The size of “implicit” government debt – together with credit guarantees for borrowings local government financing vehicles, local state-owned enterprise debt and public-private investment schemes – is unclear however Chinese lawmaker Yin Zhongqing has estimated that it may well be around 20 trillion yuan (US$2.9 trillion).

By comparison, China’s explicit local government debt, together with bonds approved by Beijing, totaled at 16.8 trillion yuan by June end.
Neither the ministry nor the National Audit Office (NAO) has given an estimate of the country’s “hidden” debt however the NAO has named six cities for suppressing a combined 15.4 billion yuan of “implicit” government debt by end of last fiscal year, with Shaoyang City in Hunan alone amassing 7.2 billion yuan.

Hefei, the capital of Anhui province, issued a press release last week stating that it had “implicit” debt of 47.5 billion yuan at the end of the fiscal year 2017, i.e. 72% of its confirmed debt. Huangnan, a locality within the poor province of Qinghai, confirmed that its local implicit liabilities reached 2.4 trillion yuan by end of the month of May – nearly fourfold increase to its confirmed total by end of last fiscal year.

The murky world of local government borrowings has long been cited as a weak link within the world’s second-largest economy. Moody’s and S&P downgraded China’s sovereign credit by one notch last year as a result of their concern over the prevailing situation.

It is also a cradle of vulnerability for Beijing because the trade war with the United States has already brought headwinds. Analysts said confidence in the Chinese economy may well hit if actuality scale of the hidden debt was disclosed.

Li Yuze, a fixed-income analyst at China Merchants Securities, said that if the “implicit” debt was factored in, the national ratio of government debt to GDP may surge from the current 36.7 percent past the dangerous level of 60% set by the Bank for International Settlements.

Li says Beijing may also not have strictly given out the definition of the implicit debt within the government order fearing “it might trigger market expectations of a second wave of debt swaps”.

Weijun (Larry) Hu

Larry Hu, the chief China economist at Macquarie Capital in Hong Kong, said there was no immediate answer to the long-standing debt problem, and though deleveraging was a secondary thought for Beijing, the newest order signaled that Beijing needed local administrative authorities to be discreet and accountable in their borrowing.
“Still, we may see the primary debt default of a local financing vehicle in the very short term, maybe a few months away,” Hu said.

21Aug 2018/Tuesday                                                                Written by Mohd Tahir Shafi 

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