China’s fiscal condition is healthy, but local governments see high debt risks

BEIJING (Reuters) – China’s overall fiscal status is sound and safe, but some local governments are facing high debt risks and large pressure of debt repayment, state media Xinhua news agency reported on Monday, citing a finance ministry official.

The comments came as investors and economists became more concerned about municipal debt risks following local government financing vehicle (LGFV) debt repayment stresses seen in provinces such as Guizhou and Yunnan. LGFVs are typically investment companies that raise money and build infrastructure projects on behalf of local governments.

“At present, local government debt is unevenly distributed, with some local governments seeing relatively high debt risks and large debt repayment pressures,” Xinhua said, citing an unnamed finance ministry official.

“We have urged relevant local governments to take the responsibility… and hold the bottom-line of preventing systemic risks,” the report said, adding that China has left enough room to deal with risks and challenges.

According to US economics and policy research firm Rhodium Group, at least 102 Chinese cities faced difficulties in managing their debt-servicing costs last year, reining in China’s ability to use fiscal stimulus to spur the economy’s post-COVID recovery. The interest burdens of the northwestern city of Lanzhou and the southwestern city of Guilin outpaced their fiscal capacity last year, Rhodium said.

“Our fiscal revenue has not been recovered to the 2019 level, but the fiscal expenditure has increased year by year. [We] must keep tightening our belt,” Xinhua said, citing Jin Hannan, head of the finance bureau in Tongshan county, Xianning in China’s Hubei province.

(Reporting by Ellen Zhang and Ryan Woo, editing by Ed Osmond)

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