SHANGHAI/SINGAPORE (Reuters) – Two economic zones in China’s eastern Jiangsu province said they have taken corrective measures after disciplinary probes found debts at their operators are “out of control”, highlighting local government debt risks and Beijing’s efforts to contain them.
The debt problems at the two local government financing vehicles (LGFVs) in the city of Yangzhou come amid a surge in LGFV borrowings as China’s economy recovers after three years of pandemic.
The Baoying Economic Development Zone said a government inspection last year found it had “lost management and control” of debt, and increased hidden liabilities of the government, Yangzhou’s anti-graft body said on its website.
To address the issue, the Baoying Zone has drafted rules to rein in debt, and has capped financing cost at 6%.
The zone said it would seek to recover losses after reckless investment in a fund product, as well as a now-failed new energy vehicle start-up.
Meanwhile Gaoyou Economic Development Zone, also in Yangzhou, said a probe last year found its operator’s debt was “growing too fast” and the LGFV had violated rules in some of its borrowings.
The zone vowed to strictly restrict debt growth and set 6% as a ceiling for financing. It will also reduce hidden debt through economizing and broadening tax revenues.
Borrowing at a cost of more than 6% would be risky as Yangzhou’s economy grew just 4.3% lat year.
The announcements come after bond issuance by LGFVs and China’s “policy” banks – such as China Development Bank – jumped during the first quarter as construction activity picked up.
LGFVs issued 811.8 billion yuan ($118 billion) worth of bonds in March, a jump of 46% from a year ago, and doubling from the previous month, according to rating agency CSCI Pengyuan.
But the path of economic recovery could be bumpy. China’s consumer inflation hit an 18-month low and factory-gate price declines sped up in March as demand stayed persistently weak.
Alicia Garcia-Herrero, chief economist Asia Pacific at Natixis, said in a March report: “We expect China’s debt burden to remain generally under control, but the pressure will increase with the economic slowdown, especially in certain regions.”
($1 = 6.8841 Chinese yuan renminbi)
(Reporting by Samuel Shen in Shanghai and Tom Westbrook in Singapore; Editing by David Holmes)