How serious is the debt of local Chinese Communist Party governments? Renowned scholar reveals inner workings

Recently, a widely circulated video has caught the attention of netizens, in which renowned Chinese scholar Wen Tiejun revealed the serious debt crisis facing local governments in China.

In the video, Wen Tiejun disclosed, “Since the reform and opening up in 1978, almost every leadership team in the Chinese Communist Party (CCP) has encountered crises. We call the leadership change cycle the political cycle, which happens to be synchronous with the economic crisis cycle. When Xi Jinping and Li Keqiang took over in 2013, the economy began to decline. Therefore, each leadership team has faced severe economic challenges.”

He mentioned, “I have students serving as deputy mayors in a pilot town in a developed province in the south. In some counties, my students serve as deputy county heads. We understand the local financial situation – in some developed counties, the debt reaches hundreds of billions or even trillions. County-level and town-level units can have debts up to tens of billions or even hundreds of billions.”

Wen Tiejun also discussed how CCP officials “settle” the huge debts left by their predecessors.

He explained, “All previous leaderships pursuing high growth leave behind a huge amount of debt when they step down. The previous officials bring in investments, achieve political achievements, get promoted, then the incoming officials are left with a mountain of debt. How to manage this debt without exposing it? Land requisition. Requisition land, mortgage it to the bank, extract 70% of the land value, use this value to balance the accounts left from the previous term. Instead of paying off the debt, they make a deal with the bank. I pay you the interest, you convert the previous term’s debt into a new loan for me. Banks are willing to do this because their accounts are balanced, their non-performing or overdue assets are not revealed, and the local debt crisis is contained. If you offend the previous official, it won’t benefit you. So, how do you deal with it during your term? You continue to bring resources to the bank for collateral to obtain funds for development.”

“The current government is facing the huge debt burden accumulated by previous governments through balancing the books. How much debt do we have now? If we calculate the visible debt, it ranges from 5 to 6 trillion RMB. ‘Trillion’ is not a small number. Government debt as a share of GDP is quite high. If we include private debt, it becomes even more troublesome.”

Wen Tiejun’s investigations found that in developed cities in the south, many enterprises are facing bankruptcy, leading to a significant rise in unemployment. He noted, “In the southern area known as the ‘world’s factory,’ the biggest problem now is the massive rise in illegal activities and social instability due to the significant layoffs. When companies go bankrupt and large numbers of workers are laid off, what arises? Rising private debts. Debt chains in regions like Henan and Shandong are beginning to break, leading to a surge in private debt conflicts spreading to Hebei and Beijing, albeit less prominently. But then, it spreads beyond Beijing and enters the northeast.”

“The debt chain today is composed of severe local government debts, now inflated into a bubble. Additionally, private debts among individuals have become significantly serious. In many investigations conducted by students in various regions, they found that over one-third of enterprises in county-level development zones have already failed. Before the enterprise owners go bankrupt, they persuade the local government to requisition land. They say, ‘I will go bankrupt, use this land for mortgage at the bank, cash out, and then run away.’ As a result, they don’t pay the land requisition money, and the people start protesting at the government. These absconding business owners shift the entire debt burden to the local government, as who else would the people turn to other than the government that requisitioned the land.”

Wen Tiejun also pointed out that social conflicts in China are severe, with confrontational conflicts emerging to some extent. He stated, “As inflation in China worsens, it will strike the real economy. If the real economy cannot sustain, it will lead to worker layoffs. For developing countries like China, an economic crisis can transform into a social crisis, and even into a political crisis, resulting in phenomena like color revolutions being quite common.”

Public information shows that Wen Tiejun is the Dean of the Institute for Sustainable Development at Renmin University of China, and the President and Chief Editor of “China Reform” and “Reform Observer” magazines, renowned for his expertise in agriculture.

It is noted that the aforementioned video was from a domestic lecture given by Wen Tiejun in 2015, but it has recently surfaced and circulated on overseas social platforms.

Notably, in the second year following Wen Tiejun’s lecture, Donald Trump ran for President of the United States. In Trump’s second year in office, the US-China trade war began, leading to a continued decline in China’s export-based economy.

Additionally, during the pandemic, the CCP authorities aggressively pushed the “zero-COVID” policy, causing a sharp contraction in the Chinese economy. Property developers have been collapsing consecutively, the financial industry has been impacted, and bad debts in hundreds of Chinese banks have soared.

Recently, a Chinese bank employee revealed some information on non-performing loan rates and overdue loan rates, which was alarming.

In a video, the bank employee disclosed, “Just returned from work at the bank – people in Dalian, the property prices should never continue to drop further, or some won’t be able to bear it anymore, especially those who bought houses on loans. Currently, the bad debt ratio and overdue ratio at the bank are beyond your imagination; those numbers are unbearable. Let’s just leave it at that.”

On Tuesday of this week (April 16th), international rating agency Fitch Ratings revised the credit rating outlook of six Chinese state-owned banks – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, Bank of Communications, and Postal Savings Bank of China – from stable to negative, citing concerns about the CCP government’s ability to provide support to the banking sector under pressure.

On April 10th, Fitch had already downgraded the outlook for China’s long-term foreign debt from stable to negative, as the Chinese economy can no longer rely on past growth patterns, facing increasing uncertainties and risks in public finances.

In December of last year, Moody’s took similar actions, downgrading the outlook of eight mainland Chinese banks from stable to negative. Moody’s anticipates that the support provided to troubled entities will become more selective, leading to further pressure and long-term risks for state-owned enterprises, regions, and local governments.

Responsible Editor: Sun Yun#