China has implemented new restrictions on local governments in 12 heavily indebted regions, in an effort to control rising debt and balance the need for economic stimulation. The restrictions, imposed by the country’s cabinet, limit the ability of these regions to take on new debt and launch state-funded projects. The regions will only be allowed to undertake specific projects that have been approved by the central government, excluding projects such as new railway stations and power plants.
A cabinet document, delivered to local governments and state lenders in late September, outlined the new restrictions. It also sets a limit on the debt growth of local government financing vehicles (LGFVs) in the 12 regions. These regions were previously identified as high-risk areas for defaulting on debt obligations.
To prioritize debt repayment, the affected regions will be allowed to extend the duration of existing loans and obtain new bank loans to replace old ones. Moreover, local governments will only be permitted to take on debt to fund major projects approved by the state council, as well as certain projects in key areas such as urban redevelopment and affordable housing.
China’s move to control local government debt comes as the country seeks to defuse debt risks, particularly as local government debt significantly surpasses that of the central government. While measures to reduce these risks were announced by China’s Politburo in July, detailed plans have yet to be unveiled.
In addition to the new restrictions, China has instructed state-owned banks to roll over existing local government debt with longer-term loans at lower interest rates. Some local governments, especially those with high levels of debt, have also started issuing refinancing bonds as a means of replacing other forms of borrowing.
The issue of local government debt poses a substantial risk to China’s economy and financial stability, especially in light of the ongoing property crisis and the impact of the COVID-19 pandemic. As China takes steps to address and mitigate these risks, the effects on the economy and the implications for future infrastructure projects remain to be seen.
