China's local governments in severe financial distress, risk bond defaults; crunch hits basic services

As the overall costs of keeping nationwide coronavirus-curbing measures in place are also rising, the fiscal budget for most of China’s local-level governments is tight. People in Changshou district in the southwestern municipality of Chongqing, and Neijiang city in Sichuan province are being charged to stay in centralised quarantine facilities, a cost previously being borne by the government.

The cost is as high as 300 yuan (US$40) per day in Changshou, according to a notice posted on the government’s WeChat account on September 21. Spending on a week's stay becomes almost impossible for most people.

Lack of finances has also disrupted public transport in many regions, such as Henan, Hunan and Guangdong. Experts see that financial problems at the local level are reflecting in almost every service and shows the local governments' inability to run basic services.

Between 2021 and 2025, roughly three trillion yuan (US$415 billion) worth of bonds sold by local government financing vehicles (LGFVs) will mature annually. The repayment pressure has become increasingly significant, according to analysts. LGFVs are a popular platform for the local governments in China for borrowing, but disclosure of the use of funds is often poor.

SCMP reported that on the evening of August 29, an LGFV in Gansu province made a last-minute dash to repay interest on a bond listed in the interbank market, after the Shanghai Clearing House announced earlier in the day that it had not received sufficient funds from the LGFV to meet its interest payment requirement. The delay in the interest payment immediately raised questions over the risks of a possible LGFV bond default in the listed market.

China’s growth is slowing and it is not expected to meet its annual target gross domestic product (GDP) of “around 5.5 per cent” this year.

(With inputs from agencies)