Where Is China’s Debt Bomb Hiding?

Chinese cities are carrying levels of debt, with Shanghai at 123 percent Photograph by Sandro Bisaro

As fears rise of companies going bankrupt and local governments defaulting, and with speculation mounting about a coming “Bear Stearns Moment,” it’s worth looking at which parts of China are most indebted.

Digging down into the debt morass, region by region, has only just recently become possible. Following orders from Beijing regulators, as of the end of January and for the first time ever, all of China’s 30-some provinces (including the big, centrally administered cities of Beijing, Shanghai, Tianjin, and Chongqing) have released figures showing their relative states of indebtedness.

Although there’s plenty to worry about, the picture is a very mixed one, with debt-to-revenue ratios varying from a low of 69 percent in the coastal province of Shandong to as high as 156 percent in the fast-expanding megalopolis of Chongqing, previously run by disgraced leader Bo Xilai.

Other top Chinese cities also showed high levels of debt, with Beijing at 135 percent and Shanghai at 123 percent. Still, they didn’t come close to matching some of their global peers, such as the city of Osaka, Japan (181 percent), or the province of Ontario, Canada (226 percent), notes a recent Moody’s Investors Services report on China’s provincial debt burdens.

China’s “local government-related debt is not a monolithic system but one that varies greatly,” writes Moody’s analyst Debra Roane in the March 25 report. She also points out that Canadian provinces are able to manage mounting debt because of their “access to a wide range of taxes that they can adjust independently”—not an option for China’s provinces or cities.

Besides overall amount of debt, the Moody’s report looks at other factors influencing the ability of localities to manage their financial obligations. An important one: debt maturity. By that measure, the danger zone shifts to China’s coastal provinces such as Jiangsu (with more than one-third of its debt due this year) and Zhejiang (about 30 percent due before next January). Beijing and Sichuan province also showed high levels of short-term debt.

The composition of the debt is changing, with borrowers increasingly relying less on bank loans and more on less-regulated sources like shadow banking. Those provinces most dependent on trust products, one popular variety of shadow credit, include the coal-mining province of Shanxi with 27 percent, followed by Chongqing at 15 percent. Next is Zhejiang, Jiangsu, and Hebei province near Beijing, all at more than 10 percent. The use of such new products as trusts “complicates the ability of the government to monitor such debt and the ability of market participants to judge the level of indebtedness of local governments,” the report says.

A final concern is the degree to which provinces rely on land sales for their revenue. Again, Zhejiang, Jiangsu, and Chongqing are among the most dependent, with Fujian and Shandong rounding out the top five. (Tibet relies less on land sales than any other region in China.) “While this revenue source has proven to be quite lucrative, it has also been highly volatile and therefore not a reliable source for debt repayment,” warns Moody’s.

One way to make indebtedness less of a risk would be to allow municipalities or provinces to issue bonds, particularly to help cover infrastructure projects that may not provide returns for many years (to date, bond financing by local governments is largely barred). “It’s not fair if projects that will benefit future generations are funded only through the tax payments of the current generation. So it’s OK to issue some bonds but under strict conditions,” said Chinese Finance Minister Lou Jiwei at a recent conference in Beijing, reported China Daily on March 26.

For the big picture? As of June 30, 2013, total local government debt and contingent liabilities had reached 17.89 trillion yuan (almost $2.9 trillion), up 63 percent from the end of 2010, announced China’s National Audit Office at the end of last year.

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