With the intensification of the trade war between China and the United States, as well as the changes in the external environment, the Chinese economy has once again seen a slowdown from May onwards. The pressure on local fiscal expenditure has increased, and the contradiction of local government financing is also becoming more apparent. Currently, the local fiscal debt in China has reached RMB 18 trillion, and it is estimated that the hidden debt of the local government is between RMB 20 to 30 trillion. The overall debt pressure is huge. As such, the current plight of the Chinese economy is, to a certain extent, the dilemma of local financing.
Although public channels are present for the issuance of local bonds, as well as credit channels for commercial banks and channels for policy financing such as shed reforms, local financing problems have become more severe since the beginning of the year due to regulation and rectification efforts of shadow banking and the strengthening of local hidden debts. Some agencies estimate that, after considering local implicit debt, the annual government's investment in a broad sense will reach RMB 10 trillion, which is a huge difference with the RMB 3.2 trillion of investment funds within the budget. In the first quarter of this year, the number of local government bonds issued was RMB 1.4 trillion. A planned new debt financing sum of RMB 1.9 trillion at the beginning of this year was also exhausted by the end of May. The scale of the RMB 3 trillion-year plan will also be used up in September, and the local government will then face the dilemma of having insufficient funds. From the perspective of policy financing, the shed reform plan, which has a greater impact on the local area, has been greatly reduced this year, making it difficult for local governments to obtain the relevant funds. China has set the 2019 full-year target of shantytown redevelopment project at 2.85 million units, and that is a significant reduction of 51% as compared with 2018.
With the limitations affecting presently open financing channels, the financing function of PPP projects has been rediscovered recently. Compared with last year, the PPP project launched in the first quarter of 2019 has seen a two-third reduction. However, since April, the number of project contracts has begun to rise significantly. As of the end of April 2019, there were a total of 8,921 projects in the management database with a total investment amount of RMB 13.5 trillion. There is a total of 5,637 landing projects with a total investment of RMB 8.6 trillion, with a landing rate of 63.2%, an increase of 0.5 percentage points from the previous month. A net increase of 78 projects took place from end March to end April, representing an investment value of RMB 111.9 billion. In terms of industries, the top three industries with a net increase in investments are transportation, urban comprehensive development and ecological construction and environmental protection, which commands RMB 86.3 billion, RMB 18.9 billion and RMB 9.9 billion respectively. These are the main elements of infrastructural investment projects which fall under the policy of stimulating economic growth. As a matter of fact, the Chinese Ministry of Finance recently asked local authorities to actively clean up the PPP projects. Coupled with the release of the Government Investment Regulations, this means that the fiscal department did not relax the prevention and rectification of local debt when they were implementing a proactive fiscal policy.
The local governments are still promoting PPP projects even after undergoing continuous rectification. This shows that the local governments in China are facing huge financing pressure, and might even be reaching the tipping point. A PPP expert who asked to remain anonymous said that the local governments only consider the projects, and does not take into account financial affordability. Some irregular PPP projects even go to the extent of generating hidden debts though what is known as "fake equities, real debts", fixed returns and guarantees that do not accord with the law. This has caused a failure in trying to achieve the goal of debt reduction. The reality is that the rectification of PPP projects has caused national enterprises to face deleveraging problems, which exist simultaneously with the previous problems of the liquidity of private enterprises and excessive expansion. In this process, financial risks have also appeared in some private enterprises that participated in the environmental protection related PPP projects, which also indicates that the local pressure on payment is increasing, ultimately affecting the income of the participants.
Previously Anbound has pointed out that with the tightening of debt management, the introduction of government investment regulations has increased constraints on local investment. In particular, it is presently not possible to find financing through means that violate the rules. Local governments are also not allowed to turn to enterprises for funding. This further tightens up hidden channels that local governments might have turned to for financing in the past. Some locals have pointed out that they are now significantly restricted by invisible debt, and that the market-financing path is now hampered with obstacles. It is difficult to finance purely public-welfare natured projects such as municipal road infrastructure projects. There is currently a lack of solutions at the local level. Some places have begun borrowing money from local civil servants, and local wage payments in arrears have also started to happen. All of these indicate that with the further closure of these financing channels, the local government's investments are facing liquidity risks, even to the tipping point of having insufficient funds.
Because of a large amount of persistent local debts, local governments still face the dilemma of liquidity and even financial difficulties in the short term. Therefore, under the policy of regulating local investment, it would be highly necessary to resolve the burdens and issues left over from the past, so that the local governments can positively utilize fiscal policy to its needs. In this regard, it is insufficient to rely solely on local market-based behavior to resolve debt problems. Anbound has repeatedly suggested that from a central level, it would be necessary to adopt an easing monetary policy approach so that it is systematically possible to solve the problem of accumulated debts and free up space for local governments to regulate financing. In addition, through the establishment of public financial institutions, unified management, organization, supervision of local financing, specifically for local governments to provide long-term cheap funds, local debts can be confined within an institutional cage.
Final analysis conclusion
The PPP projects are still growing under the policy rectification. This shows that the local government's financing needs are extremely urgent. As local finance deteriorates under the tax reduction and fee reduction policies, it can be considered that the financing pressures facing local development has already reached the critical point. To alleviate the systemic problems facing the Chinese economy, it appears that easing policy is the only option.
