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The plan to reduce the debt dates back to 2018, but was only rolled out on a large scale this year after being delayed due to the pandemic, according to Zhang Yiqun, a member of the Society of Public Finance of China. Image Credit: Bloomberg

Beijing: China could be making inroads in a long-standing battle to deal with local governments’ so-called ‘hidden-debt’ as the economy’s rebound gives officials room to focus on tackling financial risks.

An analysis of local governments’ finances shows a difference of 668 billion yuan ($103 billion) between the amount of refinancing bonds sold in the first-half of the year to roll over maturing debt and the number of bonds repaid. That implies cities and provinces may have used some of the proceeds to repay off-balance sheet debt, according to Robin Xing, chief China economist at Morgan Stanley in Hong Kong.

It “should make a positive contribution to the economy,” he said, helping to increase the transparency of government financing, reduce government funding costs and lower financial risks in the system. Local authorities issued 1.9 trillion yuan of refinancing bonds in the six-month period, while only repaying 1.2 trillion yuan in official bonds, data from the Ministry of Finance last month showed.

“Hidden debt” refers to funds raised by government-related entities, like local-government financing vehicles, to pay for infrastructure spending and other public projects. The debt raised is kept off the balance sheets of local authorities, yet carries an implicit government guarantee of repayment.

A researcher at a state-linked think tank estimated the debt pile may have reached 14.8 trillion yuan last year.

Public finances

The plan to reduce the debt dates back to 2018, but was only rolled out on a large scale this year after being delayed due to the pandemic, according to Zhang Yiqun, a member of the Society of Public Finance of China.

“The government is keeping a low profile but is determined, and local authorities are quietly making efforts” to deal with it, he said.

Policy makers see less urgency in stimulating economic growth with debt-fueled investment this year as the economy recovers from the pandemic. Instead they’re taking advantage of that rebound to try and consolidate public finances, with top leaders vowing to stabilize the debt ratio in the economy and lower the ratio of government debt.

China’s macro leverage ratio, or total debt as a percentage of gross domestic product, fell to 264 per cent at the end of the second quarter from 269 per cent at the end of 2020, according to data compiled by Bloomberg. The biggest drop came from the corporate sector, which includes local government financing vehicles.