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Officials from some of China's most indebted provinces and cities met with senior state bankers in Beijing in recent days as part of intensifying efforts to renegotiate debt payments on multibillion-dollar obligations that threaten to constrain growth in the world's second-largest economy.
China's local governments have accumulated massive liabilities over a decade of debt-fueled building spree. While the infrastructure drive has helped boost growth, many local governments are now grappling with billions of dollars in off-balance sheet debt, stifling their ability to deploy new investment and increasing pressure on the economy as it struggles to regain its footing after the pandemic.
On the sidelines of the annual political gathering in Beijing known as the “Two Sessions,” officials from Liaoning and Hebei provinces and the city of Tianjin engaged in intense high-level debt discussions with senior government bankers, according to two people familiar with the matter. Conversations and public statements from banks.
A banker familiar with the meeting between Liaoning and state institutions said: “They are all here to attend the two sessions and make transit visits to financial regulatory bodies and banking institutions.”
“But the fact that they are sitting down for such a discussion indicates the great importance they attach to the issue of reducing domestic debt and what kind of financial resources they still have access to at this stage.”
Officials from the northern province of Liaoning met with senior bankers on Saturday from 18 state financial institutions, including the Industrial and Commercial Bank of China, the country's largest bank, according to an official statement.
Senior officials from Hebei Province and the coastal city of Tianjin have held high-level meetings with state lenders including the Bank of China, according to people familiar with the situation.
Officials from Hebei and Tianjin are seeking to restructure outstanding off-balance sheet debt, while officials from Liaoning hope to refinance some debt using local state assets as collateral, the sources said. Before meeting with the banks, local officials also lobbied state regulators to get their blessing to reach out to the banks, the people said.
the pressure [of off-balance sheet debt] “The loans will push financially weak provinces to actively negotiate those forms of debt,” said Evan Chung, managing director at Moody's Investors Service.
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The governments of Liaoning, Hebei and Tianjin did not respond to requests for comment. The banks declined to comment other than their public statements.
China's local governments have accumulated as much as 94 trillion renminbi ($13 trillion) in debt, according to an estimate from Goldman Sachs, which includes liabilities from off-balance sheet entities known as local government finance vehicles — investment firms that raise debt and build infrastructure. On behalf of China. authorities. A total of RMB3.2 trillion of public bonds need to be repaid by the end of 2024, according to Moody's.
China's State Council, or Cabinet, last year sent teams of officials to more than 10 of the financially weakest provinces and cities – including Liaoning and Tianjin – to examine their books.
Beijing has also stepped in with support, arranging more than RMB1.4 trillion in special refinancing bonds to help local governments repay maturing bonds when they mature.
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These top-down efforts have succeeded in avoiding public defaults, but analysts said there is still more to be done to resolve hidden debts that do not appear on local governments' balance sheets.
“The immediate threat of bond default has been mitigated,” Moody's Chung said. “The focus has now shifted towards addressing the medium- and long-term debt of local funds, which, although less likely to cause spillover effects, require more time to manage effectively.”
In this year's budget report, China's central government pledged to “resolutely prevent any increase in hidden government debt and steadily deal with existing hidden debt.” Lan Fuan, China's finance minister, said on Wednesday that Beijing will “gradually reduce the risks” of local government debt by reducing the number of local government financing instruments and pushing local governments to sell stranded assets, while providing some financial support.
In southwestern Yunnan, 1,153 government-funded infrastructure projects such as highways and theme parks have been put on hold and new construction halted to limit expenses and focus on settling debts, according to a document seen by the Financial Times.
The Yunnan provincial government did not respond to a request for comment.
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Financial regulators have also put pressure on banks, especially state-owned lenders, to consider restructuring local government debt. Despite facing a potential loss of profits, banks realize that they face a political imperative to prioritize debt resolution.
“You probably won't see the pressure [banks’] “Balance sheets are spot on, but the work to resolve debt is putting real pressure on banks this year,” said one banker who attended one of the meetings.
“The prevailing strategy aims to postpone immediate risks by replacing time with breathing space.”
