One of China’s poorest and most indebted provinces has admitted defeat in trying to sort out its finances and is appealing to Beijing for help to avert default.
Guizhou, located in a mountainous region of southwest China, has hired a top state-owned distressed debt fund, China Cinda Asset Management, to resolve its “urgent” problems. Its total debt, including the “hidden debt” issued by the government’s financing arms, had reached 25 trillion yuan ($3.6 trillion) by the end of 2021, according to the most recent available data.
The Beijing-based firm — one of four funds created by the Chinese government in 1999 to process the bad loans of state-owned banks — announced Saturday that it would send a group of 50 experts to the province to help it “prevent and defuse risks” and “bail out” the real estate industry.
China’s local governments are struggling with trillions of dollars of debt, after three years of strict pandemic controls and a real estate crash drained their coffers. Some cities have already slashed medical benefits to seniors, sparking protests, and other vital services are at risk.
Cinda’s appointment, coming just days after the province of nearly 40 million people made an unusually public appeal to the central government for help, suggests Beijing may be starting to rescue debt-ridden regional governments to avoid potential defaults that could threaten the country’s financial and political stability.
If that happens, it would be a major policy reversal after years of leaving local authorities to manage their own debt burdens.
“The Chinese government clearly prefers local or provincial governments to sort out their own debt problems, and not create a moral hazard by helping or encouraging them to think that they can offload the problem to the central government or be bailed out,” said Steve Tsang, director of the SOAS China Institute at the SOAS University of London.
“If Beijing is seriously worried about a domino effect, I think it will bail out [perhaps under some disguise] the Guizhou administration,” he said, adding that allowing a province to default would be a major development and potentially destabilizing。
The agreement between the province and Cinda was a surprise, as China’s finance ministry signaled as recently as January that the central government wouldn’t be coming to the rescue of local governments struggling with bad debt.
In mid April, Guizhou acknowledged publicly that it was unable to tackle its own debt issues and called on Beijing for help. It was the first Chinese province to do so.
“The debt problem has become a major and urgent problem for [our] local governments,” a research team from the provincial government said in an article posted on the government’s website.
“However, due to limited financial resources, it is extremely difficult [for them] to advance the debt relief work, and it is impossible to effectively solve it only by relying on their own capabilities.”
The article was later removed, but not before it had been widely circulated on social media.
In it, the provincial government said it planned to seek “actionable advice” from a state think tank on how to defuse the risks. In China’s political context, the move was tantamount to appealing to the central government in a public address and expecting it to offer financial assistance.
“The Guizhou government’s move to openly appeal for help from Beijing is so far unprecedented, but the fact that Guizhou has done this shows how difficult it has become to manage its debt burden,” said Michael Pettis, a professor of finance at Peking University in Beijing.
“Unfortunately Guizhou is just one among many provinces that have similar debt burdens,” he said, adding that many provincial leaders may be watching Guizhou closely for an indication of what they should do next.
Such an open appeal by a local authority seeking help is extremely rare in China, where bad news about government matters is often buried. Generally speaking, political decision making in the country is an opaque process. The public appeal was surprising because Guizhou officials would have been expected to ask for help from the central authorities privately.
“It is unlikely to have resorted to such an extreme measure unless it had already exhausted all other options,” Tsang said.
It was reasonable to conclude that the authorities see Guizhou’s debt problem as “both very big and urgent,” he added.
According to public statistics, Guizhou is one of the most indebted provinces in the country, second only to the northwestern province of Qinghai.
In China, most local government liabilities are composed of “hidden debt” issued by their financing arms. Such debt is usually used to fund infrastructure spending and is not disclosed on the balance sheets of regional authorities.
A recent report by a major Chinese credit rating agency, CSPI Credit Ratings, showed that Guizhou’s “hidden debt” alone had hit 1.31 trillion yuan ($190 billion) by the end of 2021. It was the most recent estimate available.
The provincial government’s total debt ratio could have reached 245% of its fiscal income and 94% of the province’s GDP, even with a conservative estimate of its overall debt burden, it said the December report.
China’s local government debt has been rising dramatically for a decade.
Logan Wright, director of China markets research at Rhodium Group, said Guizhou’s problems were a legacy of a significant post-2008 credit and investment boom funded by China’s banks, he said.
But the problem has been exacerbated by the recent collapse in the real estate market, which has caused a plunge in land sale revenues — a significant source of income for local governments.
“The assumption was always that land sales could continue rising or generate enough fiscal resources in order to repay the debt over time,” Wright said. “But the collapse of the property sector last year, and limited prospects for its revival outside of major cities, now raises the need for more urgent assistance.”
Guizhou’s debt woes have already affected the banking system and the broader economy.
Guizhou Bank, the provincial lender backed by the government, reported earlier this month that the ratio of bad loans in its property book had surged to more than 20% in 2022, from 0.8% in 2021.
Several listed companies based in other provinces have had to write off millions of dollars of bad debt because their clients in Guizhou refused to pay what they owed.
Jiangsu-based Misho Ecology and Landscape, a landscaping services company listed on the Shenzhen Stock Exchange, said in January that a local government-backed firm in Guizhou hadn’t paid the company 150 million yuan ($22 million).
Shandong Chiway Industry Development, a Shandong-based gardening firm listed in Shenzhen, also said in January that it had to write off 700 million yuan ($101 million), because it couldn’t collect the money from several city governments in Guizhou province.
Bail out coming?
Days before Cinda stepped in to help, the country’s state assets regulator, signed a strategic cooperation deal with Guizhou’s leaders, agreeing to offer some support.
“The SASAC will encourage and support centrally-owned enterprises to work together with Guizhou in [state-owned enterprise] reforms and the cooperation between central and local authorities,” said Zhang Yuzhuo, director of the Assets Supervision and Administration Commission of the State Council, in a statement. “This is to better serve and protect the overall national situation.”
The details of a potential bailout remain hazy so far, but Beijing is now under pressure to act, according to Wright.
“How Beijing responds to the first city or province to default on publicly traded bonds or other obligations will determine the scale of the market contagion that will result,” he said.
“But ultimately Beijing is going to need to provide some form of financial assistance — there is no other realistic alternative.”