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Accessibility statementSkip to main content Democracy Dies in Darkness SubscribeSign in Close The Washington PostDemocracy Dies in Darkness WorldWar In Ukraine Africa Americas Asia Europe Middle East WorldWar In Ukraine Africa Americas Asia Europe Middle East Asia CHINA’S QUANDARY: BAIL OUT DEBT-LADEN CITIES, OR RISK DISRUPTIVE DEFAULTS? By Christian Shepherd June 2, 2023 at 7:40 a.m. EDT Visitors in Wuhan, China, during the International Labor Day weekend in April. (Getty Images) Listen 6 min Comment on this storyComment25 Gift Article Share In the central Chinese city of Wuhan, a full-page newspaper advert called out companies owing money to the city government. There were reports — quickly denied — of an 11th-hour loan to the local authority in southwestern Kunming so it could make bond repayments. And then came complaints from residents in Nanning, a city near China’s border with Vietnam, about public parking being auctioned off as a way to secure new loans. Are you on Telegram? Subscribe to our channel for the latest updates on Russia’s war in Ukraine.ArrowRight Across China local governments, whose balance sheets have long been precarious, are struggling to service debts estimated to total as much as $23 trillion. Not only do cities have to make up for nearly three years of paying for costly “zero covid” measures, they also have to contend with a property downturn, slow land sales — a primary source of their income — and a weaker-than-expected economic recovery, which means lower tax revenue. Advertisement Story continues below advertisement Now they’re having trouble repaying those debts, local governments are floundering around for cash. And that’s being felt on the ground. Teachers say they’re not getting paid. Motorists say they’re paying more for parking. More and more cities are even auctioning off public services like school lunches, shared bicycles and operating rights for vendor stalls and sightseeing carts. As the situation escalates, so too are calls for the central government to step in to defuse the situation. But policymakers in Beijing face a dilemma, analysts say. If they step in too early or with too much support, they risk undermining attempts to improve fiscal responsibility. But doing too little or waiting too long could result in defaults with widespread implications for the already slowing Chinese economy. Story continues below advertisement A spiraling crisis could severely worsen that downturn and undermine promises of the Chinese Communist Party and its top leader, Xi Jinping, to raise living standards and what he calls “common prosperity,” and tackle income inequality Previous “halfhearted” attempts to get local government debts under control were “always reversed as soon as the economic consequence started to bite,” said Michael Pettis, a Beijing-based senior fellow at the Carnegie China Center. But because debt levels rose so much during the pandemic, this time may be different. Beijing seems to finally be “getting serious about reining in local government debt this year,” he said. Even before the pandemic, economists doubted whether China could continue relying on infrastructure and construction spending, fueled by debt, to prop up the economy during hard times. Advertisement Story continues below advertisement But sticking to Beijing’s stated policy of no bailouts is potentially risky, too, because it leaves some of the least financially health parts of the economy with rising costs, little revenue and few ways to borrow more money. “The challenge for China is that the government entities that have the most debt are the ones who are least able to pay it off,” said Nicholas Borst, director of China research at investment adviser Seafarer Capital Partners, referring to the vehicles authorities use to borrow money for real estate and infrastructure projects. While Beijing has proved adept at averting full-blown financial crises in the past, this has often been achieved by simply pouring more money into infrastructure. Continuing that approach is becoming less and less effective and could even be undermining the long-term health of China’s economy. Advertisement Story continues below advertisement “Now that the balance sheets of so many local governments are weighed down with debt, they will be less able to meet Beijing’s demands for policy spending,” Borst said. That means the central government will have fewer tools available to kick-start the economy. Chinese leader Xi embarks on ‘intensive’ overhaul as he cements power Without Beijing’s help, some governments have rolled over loans, while others are coming up with novel ways to cut expenses, increase revenue and secure new loans. Sometimes they are even passing the costs on to government employees or the general public. In Wuhan, where local government coffers were strained by strict and lengthy coronavirus lockdowns, the city’s money managers last month took out a full-page ad in a local state-run newspaper urging 259 companies to “immediately” repay money owed to the government. In 2019, Wuhan spent $1.9 billion on public health. In the following three years, public health expenditure totaled $11.6 billion, largely because of costs of treating and containing the virus. Residents in Nanning, capital of Guangxi province, have complained of soaring prices for street parking and fees for electric scooters and bikes since a state-run company was granted management rights in 2018. The company also took out a $283 million loan based on its projected 25-year income, according to Caixin, a Chinese financial media outlet. Advertisement Story continues below advertisement Other cities are franchising public utilities to boost income. In theory, the agreements should mean better services and more revenue, but critics say that they can mean ordinary people pay twice: once as taxes to create the utility and then a second time to use it. “Urban roads are built with taxes paid by everyone, and car owners also pay fuel tax,” one person wrote on Weibo, China’s equivalent to Twitter, about the Nanning parking controversy. “Why should we have to pay in urban public parking spaces?” China’s economic recovery hinges on consumers. They’re not spending. The looming cash crunch has surfaced simmering fears of salary and benefit cuts for public-sector jobs. In Sanmenxia city, Henan province, 34 teachers published an open letter saying that they had been working for years without pay. In response to an outcry online, the local education bureau said that the problem was caused by a policy shift that delayed payment for teachers recently transferred from private to public schools. Advertisement Story continues below advertisement For some parts of the country, the problem appears to be less about covid expenditure and more about systemic issues stemming from a decades-long building binge. In southwestern Kunming, rocked by multiple public finance-linked corruption scandals in recent years, city authorities last week denied “rumors” that its local government financing vehicles were struggling to pay off debts, after minutes allegedly of an internal meeting were circulated online. Lavish spending on gravity-defying bridges and thousands of miles of roads as part of efforts to alleviate poverty in mountainous Guizhou have also left the province straining to stay afloat. The finance bureau in its capital city, Guiyang, said this month that “technical means of debt reduction have been basically exhausted,” adding that large debts in certain districts meant “risks may occur at any time,” according to Chinese media. The report was later deleted. Pei-Lin Wu in Taipei, Taiwan contributed to this report. 25 Comments GiftOutline Gift Article Subscribe to comment and get the full experience. Choose your plan → View more Loading... 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