SinoInsight 1
PRC premier Li Keqiang presided over a symposium in Shanghai with leading officials of several provincial governments to analyze China’s economic situation and “study and do a good job” in economic and social development work.
In his speech at the symposium:
- Li admitted that the “new challenges” facing the CCP are “intertwining, overlapping, and exceeding expectations.”
- Li revealed that China’s economy is facing several difficulties, but added that the regime “continues to develop the economy steadily while overcoming difficulties” under the “strong leadership of Party Central with Comrade Xi Jinping at the core.”
- Li noted that China’s economic difficulties include outstanding problems affecting economic operations (rising commodity prices, power crunch due to tight coal supply, severe flooding, etc.). He added that “increased instability and uncertainty in the domestic and international environment” are creating “new downward pressures on China’s economy.”
- Li requested that local governments make “protecting market players, especially small and medium-sized enterprises and individual entrepreneurs” the focus of their policies. He also called on local governments to “implement well” national policies on tax cuts and fee reductions, as well as market supply and price stability. Local governments should also “take measures” to clear outstanding accounts receivable from small and medium-sized enterprises, and “help” market entities “reduce costs and resolve problems.”
- Li called on local governments and relevant departments to be “practical and realistic” and “seek truth from facts” in introducing relevant economic policies and measures, and avoid adopting “campaign-style, aggressive, one-size-fits-all” measures. Also, the government should persevere in leading “thrifty times” (過緊日子), “concentrate financial resources to ensure the implementation of policies to reduce taxes and fees,” and “guarantee the basic livelihood and operation at the grassroots level.” Further, local governments should ensure that the central governments transfer of payments to them will go more directly to the grassroots, and provincial level governments should strengthen financial support for governments at the county level and below.
- Li again stressed the need for “simplify procedures” (放管服, or decentralize powers, enhance supervision, optimize public services) reform to “release the vitality of various market entities” and “resolutely oppose formalism, bureaucratism, and ensure that all work achieves effective results.”
The PRC Ministry of Finance released local government bond issuance and debt balance data for October (10月地方政府债券发行和债务余额情况):
- Local governments issued a total of 6.4916 trillion yuan of bonds from January to October 2021. Of the total, 2.4705 trillion yuan were general government bonds and 4.0211 trillion yuan were special government bonds. Also, 3.6625 trillion yuan of bonds issued during the period were new, while 2.8291 trillion yuan of bonds were for refinancing.
- Local governments made 2.4977 trillion yuan in repayments on matured bonds, of which 2.1397 trillion yuan were repaid by issuing refinancing bonds, and 358 billion yuan were repaid using fiscal funds and other means. Local governments also repaid 179.5 billion yuan in principal that was due in October.
- Local governments made 811.9 billion yuan in bond interest payments from January to October 2021, of which 62.2 billion yuan was for the month of October.
- The national local government debt balance at the end of October was 29.6549 trillion yuan, or the debt limit approved by the National People’s Congress. Of the total, 13.7549 trillion yuan was general debt and 15.9 trillion was special debt.
OUR TAKE
Li’s exhortation to local governments to “implement well” the central government’s various economic policies (protect market players, tax and fee reductions, “simplify procedures” reform, etc.) and criticism of their “campaign-style, aggressive, one-size-fits-all” measures reveal two things. First, Beijing is anticipating and forestalling the officialdom’s tendency to default to CCP characteristics (“prefer left rather than right” approach, prioritization of local interests over central interests, etc.), and is looking to overcome the “orders not leaving Zhongnanhai” (政令不出中南海) governance problem to better steer the regime through troubling times. Second, the business environment for Chinese private enterprises has worsened to a point where many will struggle to survive without government support and the survival of the regime is threatened.
Li Keqiang’s frank assessment of China’s economic problems seems to sharply contrast with the claims of “historic achievements” and “historical changes” under Xi Jinping in the latter’s “historical resolution.” This does not signal a difference in opinion or political “split” between Xi and Li, but rather, is a regular quirk of the CCP totalitarian system. On the one hand, the CCP needs to keep rolling out propaganda (including Xi’s “historical resolution) to upkeep its “great, glorious, correct” image. On the other hand, the CCP sees value in being “practical and realistic” and “seeking truth from facts” by admitting that some problems are severe and criticizing wayward official behavior so as to spur better governance from the officialdom and resolve central-local government issues. Moreover, Li maintains “positive energy” while touting Xi’s indispensability despite his bleak assessment of economic matters, noting that the regime “continues to develop the economy steadily while overcoming difficulties” under the “strong leadership of Party Central with Comrade Xi Jinping at the core.”
2. Local government bond data further underscores the troubles facing the Chinese economy this year. On the whole, local governments are experiencing difficulties in issuing bonds while China’s debt bubble continues to expand.
Table 1 (Source: PRC Ministry of Finance)
a) From Table 1, the ratio of refinancing payments (“borrowing new to pay off the old” 借新還舊) and repayments of principal and interest of local bonds increased significantly this year. Meanwhile, the local governments are seeing significantly reduced funding from the issuance of new bonds to stimulate the economy.
In the first 10 months of 2021, local governments issued 6.4916 trillion yuan of local bonds, of which 2.8291 trillion yuan (43.6 percent) was used to make refinancing payments, representing a 73.8 percent increase from a year ago; in comparison, refinancing bonds made up less than 30 percent of total local bonds issued during the January-October period in 2019 and 2020. Meanwhile, the issuance of new local bonds fell 18.5 percent from the previous year to 3.6625 trillion yuan, representing 56.4 percent of total local bonds; in comparison, new local bonds made up 73.4 percent of total bonds issued in 2020.
Local governments made 2.4977 trillion yuan of repayments on principal during the January-October period (up 53.8 percent year-on-year), of which 85.7 percent (2.1397 trillion yuan, up 50.7 percent year-on-year) of the repayments were made through the issue of refinancing bonds. Also, local governments pay 811.9 billion yuan in interest in the first 10 months of 2021, an increase of 17.4 percent from a year ago. This means that over 51 percent of local bonds issued by local governments were used to make payments on old bonds and interest, compared with 38 percent in 2020.
b) The data in Table 1 also shows that the CCP has been finding it increasingly difficult to issue local bonds this year. While the progress of bond issuance during the January-October period is consistent with previous years, the proportion of local bonds issued in the month of October (13.5 percent) is much higher than in 2019 (2.3 percent) and 2020 (7.2 percent).
With the onset of winter hampering infrastructure construction in most regions in China, the stimulus effect from the issuance of new local bonds for the rest of the year will be much weaker even if the overall progress of bond issuance is the same as the previous two years. For comparison, October 2019 saw only refinancing bonds being issued by local governments with no new bonds; October 2020 saw the issue of 189.9 billion yuan of new bonds, or 43.9 percent of all local bonds issued that month; October 2021 saw new bonds account for 70.1 percent (614.5 billion yuan, a 10-year high) of total bonds (876.1 billion yuan) issued that month. While local governments can still issue 362.53 million yuan worth of local bonds in November and December, these bonds will do little to stimulate the economy beyond allowing local governments to make repayments on old bonds.
c) Aside from experiencing difficulties in issuing bonds, local governments also find themselves without projects to invest in after raising funds.
According to a recent analysis of local government special bonds by Tianfeng Securities fixed income chief analyst Sun Binbin (reported by mainland media on Nov. 15), a review of past audit reports issued by provincial and municipal local governments shows that most of the special bond funds of eastern and central provinces and cities have been underutilized. These underutilized and idle funds accounted for more than 10 percent of the debt limit increase for the year, and even up to 25 percent in some provinces. Sun estimates that the idle funds in central and western provinces and cities that have not released their data may be as high as 20 to 30 percent of the debt limit increase for the year.
Sun Binbin also pointed out that in practice, most localities will put a large proportion of new special debt into projects under construction to pay off maturing debt, rather than new projects. This indicates that local governments are finding it hard to add new projects, while existing projects are experiencing difficulties. Sun believes that this phenomenon will massively discount the role that new special bonds have in boosting infrastructure investment.
Based on a manual combing of statistics (neither official sources or Wind have data on the utilization of new special government bonds for projects under construction), Sun Binbin found that the city of Tianjin invests 76.52 billion yuan (about 71 percent) of the 107.5 billion yuan of special bonds it issued in 2021 in existing construction projects (projects started before 2021). Meanwhile, only 29 percent (30.98 billion yuan) of Tianjin’s special bond fund was invested in new projects (projects that commenced in 2021).
3. Li Keqiang’s concerns about the economy and the situation with the issuance of local government bonds affirm our previous analysis of the state of the Chinese economy. We are even more pessimistic now about the performance of China’s economy in the fourth quarter and for the entire year.
We believe that Beijing will continue to struggle to get local governments to properly implement central government orders and deliver results given that CCP characteristics have been deeply ingrained in the officialdom. Economic crises and risks at the local government level will thus be transferred to the central government, leaving the Xi leadership vulnerable to political Black Swans.
