China Economy: Financial Distress Of Local Governments Raises Debt-Default Risks, Weighs On Average Chinese

With local-level coffers running low amid China’s property woes and zero-Covid restrictions, some governments are trying to save money by passing on costs. There are also rising concerns other public services, such as transport, may see budgetary cuts

Growing financial distress in regions across China is raising the risk of local governments defaulting on their bonds, as the nation presses on with its costly zero-Covid strategy.

The weakening of local government finances has been of growing concern in recent weeks, triggering questions about whether local Chinese authorities will need to cut back on spending in public services, and about the overall rising costs of keeping nationwide coronavirus-curbing measures in place.

Many of China’s local-level governments have been struggling with tight fiscal budgets for years. In recent weeks, Changshou district in the southwestern municipality of Chongqing, and Neijiang city in Sichuan province, started charging people to stay in centralised quarantine facilities that were previously funded entirely by the government, SCMP cited.

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In Changshou, non-local residents who stay in one of the quarantine centres are now being charged up to 300 yuan (US$40) per day, according to a notice posted on the government’s WeChat account on September 21.

There are exceptions, such as for doctors and students, but when the mandatory quarantine period lasts a week, an additional 2,100-yuan expense is simply unaffordable for some people.

The disruptions demonstrate that there are weaknesses in some local governments’ ability to safeguard public services

Luo Zhiheng, Yuekai Securities

China’s zero-Covid policy mandates mass screenings, lockdowns and lengthy quarantines. The policy has even pushed some local governments to transfer possibly “exposed” people to quarantine centres instead of allowing them to quarantine at home, as an extreme means to curb local infections.

There have also been reports of disruptions to public transport services in provinces such as Henan, Hunan and Guangdong due to financial troubles, and these problems reflect growing challenges facing some local governments, said Luo Zhiheng, chief macroeconomic analyst with the research institute of Yuekai Securities.

“This connects to everything, from drivers’ salaries to low-income groups’ ability to travel,” Luo said in a note last week. “The disruptions demonstrate that there are weaknesses in some local governments’ ability to safeguard public services.”

Between 2021 and 2025, roughly 3 trillion yuan (US$415 billion) worth of bonds sold by local government financing vehicles (LGFVs) will mature annually, and the repayment pressure has become increasingly significant, according to analysts.

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