Finance Minister Again Warns About Hidden Local Government Debt

* A few local governments have continued to illegally borrow money off-the-books through local government financing vehicles, Finance Minister Liu Kun said

* Hidden local government debt amounted to around 40 trillion yuan as of end of last year, and the interest payments alone could reach 600 billion yuan in 2019, economists estimate

(Beijing) — Local authorities are still dealing with their hidden debts, though China’s overall local government debt remains manageable, Finance Minister Liu Kun said Thursday.

A few local governments have continued to illegally borrow money off-the-books through local government financing vehicles (LGFVs), Liu said at a press conference (link in Chinese) during the country’s annual legislative session.

The ministry has been monitoring LGFVs across the country, and will hold local authorities accountable for any new hidden debt they take on, he said.

As of December, China’s outstanding local government debt amounted to 18.4 trillion yuan ($2.74 trillion), while overall government debt, including central government debt, amounted to 33.4 trillion yuan, official data show.

The ratio of local governments’ outstanding debt to their combined public revenue stood at 76.6% at the end of last year, lower than warning lines between 100% and 120% widely adopted by other countries, Liu said. Meanwhile, the ratio of overall government debt to gross domestic product was 37%, well below the 60% warning line set by the European Union.

When calculating these two ratios, however, China only takes officially reported debt into account. Hidden, off-the-books local government debt amounted to around 40 trillion yuan as of end of last year, and the interest payments alone could reach 600 billion yuan in 2019, economists from investment bank Nomura International (Hong Kong) Ltd. estimate.

On Tuesday, the ministry proposed allowing local governments to raise up to 3.08 trillion yuan by issuing local government bonds, with 930 billion yuan earmarked for general purpose bonds. Localities can spend the proceeds from these bonds on general budget expenditures, but the bonds have to be repaid from government revenues.

The remaining 2.15 trillion yuan can only be raised through special-purpose bonds, which in theory will not impact local government budgets.

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)