(Xuezhizhi Economic Original)
Compared with the United States, Japan and European countries, China's government sector leverage ratio is not high, and the overall debt risk is controllable. In advanced economies, the central government is mainly responsible for government debt, and the proportion of local government debt is low. There are large differences in the debt structure of China's government departments, with the proportion of central government debt being low, the proportion of local government debt being high, and there is a large scale of local government implicit debt. China's government sector debt risk is mainly concentrated in the implicit debt of local governments.
The overall debt risk of the government sector is controllable
Overall, the level of debt in China's government sector is not high, and there are no obvious risks. In horizontal comparison, the leverage ratio of China's government sector is lower than that of most countries and economies. As of the third quarter of 2023, the leverage ratio of China's government departments (including central and local governments) was 53.8%, which is at a medium level internationally, and the overall government debt risk is controllable. Even if local government implicit debt is included, the debt ratio of the broad government is about 95%-110%, which is also lower than the average level of developed countries, and the overall debt ratio is still at a reasonable level. According to the Bank for International Settlements, China's government leverage ratio is 79.4%, which is lower than most advanced economies, as well as major emerging economies such as Argentina, Brazil, and India.
Source: Bank for International Settlements, Xuezhizhi Economics
The central government has a low leverage ratio and less debt pressure. As of the third quarter of 2023, the central government's leverage ratio is 22.6%, which is at a very low level in the world, and the debt balance is about 28 trillion yuan. The explicit debt risk of local governments is controllable, and the leverage ratio is at a reasonable level. As of the third quarter of 2023, the local government leverage ratio was 31.2%, and the debt balance was about 39 trillion yuan. The explicit debt of local governments is always controlled within the limit approved by the National People's Congress, which is in line with the level of economic development, and there is no obvious risk. The total explicit debt balance of the central government and local governments is about 67 trillion yuan, which is not large as a whole, far lower than the GDP scale of more than 120 trillion yuan in 2022. It is important to know that the debt balance is the result of the accumulation of years and is a stock data. GDP is the gross economic output of the year, which is a flow data. There is a non-reciprocal relationship between stock data and flow data, and even if the debt exceeds GDP, it does not mean that there is a risk, not to mention that the debt of the Chinese government is far less than the GDP generated each year.
At the same time, the Chinese government receives a steady increase in fiscal and tax revenues every year, and the scale of assets at its disposal far exceeds the size of debt, which can fully cover the existing debt. In 2023, the national public finance revenue will reach 21.7 trillion yuan, a year-on-year increase of 6.4%, and it will take less than three years of revenue to cover the existing debt. According to the comprehensive report on the management of state-owned assets by the State Council, as of the end of 2022, the total assets of state-owned enterprises nationwide were 339.5 trillion yuan, the total liabilities were 218.6 trillion yuan, and the net assets of state-owned enterprises reached 120.9 trillion yuan. This is only a fraction of the government's assets, which far exceed the size of government liabilities. The Chinese government also has a large amount of unmonetized land, minerals, forests, and other natural resources that are not monetized, which are potential sources of assets for the government. In short, if we look at the annual flow of funds and income and the stock of assets at hand, the debt pressure of China's government departments is relatively small, and there is a lot of room for maneuver.
Data source: Ministry of Finance, Xuezhizhi Economy
Structural problems of local government debt
Although the overall government debt risk is controllable, especially the central government debt pressure is small, the local government debt is growing too fast, and there are increasingly prominent structural problems, especially the hidden debt risk.
First, the expansion of local government debt has accelerated. Over the past 20 years or so, the scale of the mainland's debt has continued to grow, despite the large number of measures taken to resolve local debt. In 2006, the leverage ratio of local governments was less than 10%; In 2011, it exceeded 16% and exceeded the central government's leverage ratio; In 2013, it rose to more than 20%. After the implementation of the newly revised Budget Law in 2015, it was supposed to be a window period for debt reduction, but local government debt has grown rapidly, and it has become more severe after 2018. At present, the leverage ratio of local governments has risen to more than 30%, and if it is not controlled, it will continue to rise in the future according to the current trend.
Second, there are structural and regional problems in local government debt. From the perspective of debt structure, most developed countries have a large proportion of central government debt and a small proportion of local government debt. In China, on the other hand, local government leverage has exceeded that of the central government since 2011. Since the financing cost of the central government's issuance of treasury bonds is significantly lower than that of local government financing, China's government debt structure is destined to be on the high side of financing costs and greater pressure to repay debts. From the perspective of regional differences, the eastern region has a large debt scale and a low debt ratio, so the risk is low. Some areas have relatively high debt ratios and greater debt repayment pressure, mainly concentrated in the central and western regions with underdeveloped economies, backward industrial development, and limited financial resources.
As of the end of 2022, the top four provincial-level local government debt were Guangdong, Shandong, Jiangsu, and Zhejiang, with 2.51, 2.36, 2.07, and 2.02 trillion yuan respectively, and the total proportion of the four provinces in the national local government debt reached 25.6%. If we add Beijing, Shanghai and Fujian provinces, the proportion of local government debt in the seven eastern provinces and cities reaches 34.5%, and the risk of these debts is relatively small. If we add Sichuan, Hebei, Anhui, Hubei, Shaanxi, and Shanxi provinces, which are six provinces with controllable debt ratio risk, the total ratio of local government debt to the country has reached 56.5%, which is more than half. Local governments at risk of debt repayment are mainly located in other areas where the scale of debt is not large, but the fiscal revenue capacity is low.
Source: National Balance Sheet Research Center, Xuezhizhi Economy
Data source: Ministry of Finance, Xuezhizhi Economy
Third, the risk of implicit debt is heavier, which is the most important problem of local government debt. At present, China has different understandings of the connotation and boundaries of local government implicit debt, and there is a lack of unified definition standards. Therefore, there is no accurate figure on the scale of local government hidden debt, and most institutions predict it to be around 50-70 trillion yuan. The sources of implicit debts include local government financing platforms, state-owned institutions, affordable housing projects, shantytown reconstruction projects, etc., and even non-performing assets of non-financing platforms, non-performing assets of local financial institutions, and non-standard PPP projects can also be included in implicit debts. Among them, the financing platform is the main source of risk.
Based on the average debt cost of 5-6% of local financing platforms, local governments need to pay more than 3 trillion yuan in interest on implicit debts every year, accounting for more than 30% of local government budget revenue. In the past, land finance formed a strong support for implicit debts, and the debt risk was not obvious. In recent years, due to the impact of the real estate downturn, the income from land transfers, which is an important source of repayment, has dropped sharply, which has tightened local financial funds and exposed debt risks. If a debt resolution plan is not introduced in a timely manner to reduce the pressure of debt repayment, it may affect the normal operation of some local governments.
(Original work, please pay attention to the wisdom of learning)