China 117 Tower, the world’s sixth-tallest skyscraper, should be an extraordinary sight—rivalling anything Dubai or New York has to offer. But construction on it was never completed
s can no longer issue bonds in China’s domestic market or refinance maturing ones. Payouts on bonds exceeded money brought in from new issuances in the final three months of 2022, for the first time in four years. To avoid defaults many are now looking to informal channels of borrowing—often referred to as “hidden debt” because it is difficult for auditors to work out just how much is owed. Interest on these debts is much higher and repayment terms shorter than those in the bond market.
These higher rates have the makings of a crisis. A report by Allen Feng and Logan Wright of Rhodium, a research firm, estimates that 109 local governments out of 319 surveyed are struggling to pay interest on debts, let alone pay down principals. For this group of local authorities, interest accounts for at least 10% of spending, a dangerously high level. In Tianjin, the figure is 30%.
Some local governments have started to sell assets to try to avoid defaults. A recent loosening of rules on stock exchanges could help localities raise capital from the public through listings. Governments could also start hocking assets in private transactions. It is unclear, though, how far officials are willing to go, or who will buy the assets on offer.
The central government is transferring funds to localities on a grander scale than ever before. More than 30trn yuan was made available between 2020 and 2022, according to Messrs Feng and Wright. Anin the city of Zunyi, in the indebted south-western province of Guizhou, recently agreed with local banks to lower interest rates, defer principal payments for ten years and extend the maturity of its debt to 20 years. Such arrangements could become more common in future.
But ever-growing debt over the past decade suggests that many projects will never become truly profitable, says Jack Yuan of Moody’s, a ratings agency. The troubledin Zunyi, for instance, has had negative cash flows since 2016, and seems to have little hope of a turnaround.
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