The local government debt of the Chinese Communist Party (CCP) has reached trillions of yuan, with an overall debt ratio exceeding 100%. To assist local governments in resolving their high debts, Beijing had to raise the local government debt ceiling. Analysts believe that Beijing’s support is limited, and as the debt accumulates, the probability of systemic risks increases.
The 12th session of the 14th National People’s Congress of the CCP recently concluded. CCP Minister of Finance Lan Fo’an stated in a press conference on November 8th that starting this year, 800 billion yuan will be allocated annually for the next five years from new local government special bonds to be used specifically for debt restructuring, totaling 4 trillion yuan for the replacement of implicit debt. The NPC also approved a debt ceiling increase of 6 trillion yuan, totaling up to 100 trillion yuan in local “debt restructuring resources.” NPC Budget Committee Director Xu Hongcai mentioned that the additional 6 trillion yuan debt ceiling will all be special debt limits to be implemented over the next three years.
Just how much debt do CCP local governments owe that requires the central government to raise the debt ceiling? CCP Central University of Finance and Economics Party Committee member and Vice President Li Jianjun provided some data.
At the 2024 Financial Street Forum held in Beijing on October 18th, Li Jianjun stated that as of June 30th this year, the CCP local government debt balance in the legal portion was 42.23 trillion yuan; urban construction bonds and implicit debt amounted to 57.16 trillion yuan. Without factoring in implicit guarantees, the total approached 99.39 trillion yuan, nearing a trillion yuan in scale.
David Huang, a Chinese-American economist residing in the United States, believes that the effectiveness of this debt restructuring resource provided by the CCP authorities is “relatively limited.”
He explained to Da Ji Yuan that if this 100 trillion yuan is implemented over three to five years, at most 3 trillion yuan can be allocated annually, representing only 3% of the 100 trillion yuan. This amount can only cover the interest on these debts, showcasing its limited impact. Therefore, it can only provide temporary relief for the impending explosion of local debts, postponing the debt issue without fundamentally solving it.
Li Jianjun also mentioned at the above forum that with a trillion yuan scale of local government debt, coupled with 30 trillion yuan in central government debt, the CCP government’s overall debt ratio has exceeded 100% compared to China’s 126 trillion GDP last year, far surpassing the international warning line of 60%.
He stated that when observing local government debt situations, it is generally measured through two indicators: local debt ratio, which is the ratio of local debt to local GDP, and local debt ratio, which is the ratio of local debt to local comprehensive financial strength. Most Chinese provinces have surpassed the international warning lines of these two indicators, with some even exceeding both simultaneously.
Wan Jun Qiu, a professor at the Department of Finance and Finance at Northeastern University in the United States, believes that when the debt ratio exceeds the internationally recognized warning line, countries face high risks in their fiscal, economic, and financial aspects.
He told Da Ji Yuan that when government finances are eroded by debt interest, it becomes impossible to expand public investment or provide better public services. The burden of debt also affects national economic growth, as funds cannot be invested in production. The financial system may see increased default risks due to the escalation of debt levels, leading to non-performing assets and heightened uncertainties in financial markets. This uncertainty could impact investor confidence, potentially exacerbating capital outflows.
Currently, internationally, the EU’s overall debt ratio is over 80% (with significant variation among member states); the U.S. government’s debt ratio was over 120% last year; and Japan’s government’s debt ratio ranked highest globally, reaching 255% compared to GDP last year. Japan’s high debt ratio is mainly driven by long-term low growth and substantial government expenditures. Taiwan’s debt ratio is relatively impressive, standing at only 28.3% last year, significantly below the global average.
Wan Jun Qiu mentioned that the U.S. and Japan are mature economies with relatively high debt ratios but without significant increases in systemic risks. China is an emerging economy and cannot be compared to them. China can be compared to Taiwan, also an emerging economy, where China has a considerable gap in this aspect. The CCP’s government finances are exhibiting a “premature aging” status.
He expressed that if high local government debt is merely a short-term measure, possibly sustained through refinancing or central government assistance, it might temporarily hold up. However, in the long run, it becomes unsustainable. As debts accumulate over time and fund costs increase with rising interest rates, combined with slowing economic growth, the probability of systemic risks in the financial system increases.
Currently, China’s real estate market is collapsing, funds are rapidly flowing out, foreign investments are gradually withdrawing, youth unemployment rates are high, and consumer confidence is low. After Trump won the U.S. presidential election, China’s economy may worsen.
In the early morning of November 6th, Trump swept the U.S. presidential election with an overwhelming advantage. He had previously stated multiple times that, after taking office, he would impose tariffs as high as 60% on Chinese products.
David Huang believes that if Trump indeed imposes a 60% tariff on Chinese products, the impact on the Chinese economy could be “devastating.”
He explained that since China is an export-driven country, and the U.S. is its most significant export destination, a 60% tariff increase severely diminishes profits for Chinese companies, leading to a sharp decline in exports. As companies go out of business, the impact will extend to associated upstream and downstream enterprises, affecting the entire manufacturing industry.