The debt ratio of local governments in China is rather high. Statistics from the Chinese Ministry of Finance show that as of the end of 2017, the local government debt balance was RMB 16.47 trillion; at the end of 2016, the local government debt balance was RMB 15.32 trillion, and the local government debt ratio (debt balance/integrated financial resources) was 80.5% .
With the recent rectification of public-private partnership (PPP), one can see the predicament of local government debt problems. The PPP model refers to the government and private organizations providing certain public goods and services based on the franchise agreement to form a cooperative partnership, and clarifying the rights and obligations of both parties through the signing of contracts. However, in reality local governments have adopted disguised means such as PPP and government procurement services, and causes rapid increase in the scale of debt; the debt rate has even exceeded the warning level and formed potential risks.
Since 2016, the Chinese Ministry of Finance and the National Development and Reform Commission (NDRC) have gradually realized the seriousness of the PPP issue. The supervision of PPP has continued to increase; some PPP projects that have been in operation will be "purged" or rectified within certain time limit. In the second half of 2017, the Ministry of Finance, the State-owned Assets Supervision and Administration Commission (SASAC), and the NDRC issued a series of documents to regulate the management of PPP projects and strengthen the local government debt risk control.
According to the latest statistics from the PPP Center of the Ministry of Finance, as of April 23 this year, a total of 1695 liquidation projects have been cleared across the country, involving an investment amount of RMB 1.8 trillion; and 2005 rectified projects have been reported, involving in investment of RMB 3.1 trillion. This is the first time for the Ministry of Finance to announce the results of PPP consolidation and rectification that lasted for more than four months. This result means that 3700 PPP projects have been cleared or rectified in China, accounting for about 51% of the total number of the projects being managed; the projects that are being cleared or rectified accounted for RMB 4.9 trillion in investment funds, about 36% of the total investment in the projects.
Anbound research team has not been optimistic about the PPP model. As early as 2015, Anbound believes that with the intense promotion by the Central Government, the PPP model has been rapidly "mutated" and is gradually moving away from the original intention of the Central Government. The conditions for large-scale launch of PPP in China are still not mature; government agencies should abandon the promotion of PPP projects. Instead, market-oriented reforms should be implemented to promote the recovery of the Chinese economy.
It is worth noting that at first the PP projects were being vigorously promoted by the government in the past, now they have been rectified, and all these happened within mere 4 to 5 years. Anbound believes that the rectification does not aim at the PPP model itself, but rather at the local debts caused by the PPP development. It should be noted that standardized PPP operation will not form local debt, yet in practice under the "innovations" of the local governments it has become a disguised form of debt expansion.
In 2015, the Chinese Ministry of Finance requested that all annual expenditures for all PPP projects to be allocated from the budget, and the proportion of general public budget expenditure should not exceed 10%. However, in reality the expenditure responsibilities of some cities and counties have exceeded the 10% limit, conservatively there are about 253 cities and counties belong to this category. It is also important to point out that some local governments also use implicit means and liabilities to avoid the "red line" of the 10% limit, which undoubtedly increases the debt risk of the local governments.
Before the financial crisis, China's local economy mainly focused on industries; the various industrial parks and high-tech parks throughout China were an important support for the local economy. After the financial crisis, the industrial development gradually declined and the export processing industry has felt the impact. The supporting role of the incremental part of the local economy became weakened. In order to save the economy, like other central banks in the world, the People's Bank of China started to provide larger amount of loans. The RMB Four Trillion Stimulus Plan was then introduced to stimulate local and social investments. In addition to stimulating some industries, the large number of monetary expansions has also encouraged the real estate industry. The Central Bank's plan of stimulating real estate has caused the rise of urban asset prices, which in turn causes the continuously increase of the land fiscal revenue has also further increased the asset bubbles.
Final Analysis Conclusion:
The Chinese government emphasizes debt pressure, but the pattern of local development has not yet been fully reversed, and the assessment method has not completely changed. Coupled with the absence of new economic support, the transitional development is under pressure. However, China's government departments still have to persist in the transformation and development. This requires China to continue to adhere to reform and opening-up and continue to promote innovation and development.
