(Bloomberg) -- China’s bid to reassure investors over its soaring local debt did little to soothe concerns over financial stability risks in the world’s second-largest economy.
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Xinhua News agency published a report Monday quoting an unidentified official from the Ministry of Finance saying government finances are healthy and safe, and authorities had enough resources to tackle risks. Systemic risks would be avoided, the official said.
Economists said the statement didn’t provide any new detail that would give investors confidence the debt — which Goldman Sachs Group Inc. estimates was 156 trillion yuan ($22 trillion) last year when including off balance-sheet borrowing — could be brought under control. The ballooning levels of municipal borrowing was listed as the number one financial risk for investors across Asia this year, according to a recent Bloomberg survey.
“Beijing is trying to send a message that there’s no need to panic,” said Wei Yao, chief economist for Asia-Pacific and China at Societe Generale SA. “But the report will only have limited effect soothing concerns — the data is public and speaks for itself.”
Many local authorities are facing severe fiscal stress after revenue from land sales — a major source of government income — plummeted amid a downturn in the property market. Some regions like Guizhou in southwest China have been forced to publicly ask the central government for more help.
The off balance-sheet borrowing raised by local government financing vehicles, or LGFVs, is of particular concern, with economists warning China could potentially have its first public bond default by an LGFV. An LGFV linked to Kunming city last month narrowly avoided a bond default.
Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc., said the language Xinhua used in the report about the ways to address the local debt issue — such as Beijing’s stance that the central government wouldn’t bail out an LGFV — suggested there was “nothing new” in it’s message.
Although the chance for LGFVs to default on public bonds is still low, repayment failures are possible on private borrowing, he added.
“The arguments made in the article appear general and the anonymous official interviewed does not seem to carry a lot of weight, not enough to set investors’ mind at ease,” he said.
In the Xinhua report, the Ministry of Finance official said the distribution of local government debt is “unbalanced,” with some regions exposed to “relatively high risks and under rather big principal and interest payment pressure.” Local authorities were urged to tackle their debts and “hold on to the bottom line that no systemic risk will occur,” the official said.
Local governments have become more reliant on transfer payments from Beijing to help plug their financial gaps. Transfers from the central government are expected to hit 10 trillion yuan this year, equivalent to 86% of the income local governments are forecast to make from taxes and fees this year, according to Bloomberg calculations based on official data. That’s up from 66% in 2015.
Wang Tao, chief China economist at UBS Group AG, said it would be “unrealistic” to expect the central government to step in and bail out local governments because of concerns over moral hazard — a situation where a bailout encourages businesses or local governments to take on more risky debt.
China will probably rely on banks to restructure the debt and push local authorities to sell assets other than land, such as state-owned enterprise shares, she said. Defaults would likely be avoided at the expense of banks’ profit margins.
In the long run, “there will be a smaller role played by government, especially local governments, in the overall economy” as there will be less revenue from land and therefore less financial resources to invest in infrastructure, Wang said. It would be very difficult to increase taxes “in a significant way that will offset the land sales,” she said.
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