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Officials from some of China’s most indebted provinces and cities met with top state bankers in recent days in Beijing as they step up efforts to renegotiate debt payments on billions of dollars of liabilities that threaten to limit growth in the country’s second-largest economy. world.
China’s local governments have accumulated huge liabilities during a decade of debt-fueled building spree. While the infrastructure push has helped fuel growth, many local governments are now grappling with billions of dollars in off-balance sheet debt, stifling their ability to implement new investments and increasing pressure on the economy as it struggles to regain its footing after the pandemic.
On the sidelines of the annual political meeting in Beijing known as the “Two Sessions,” officials from Liaoning and Hebei provinces and the city of Tianjin engaged in broad, high-level discussions about the debt with top state bankers, according to two people who they are familiar with the topic. interviews and public statements by the banks.
“They are all here to participate in the Two Sessions and occasionally visit financial regulatory agencies and banking institutions,” said a banker familiar with the meeting between Liaoning and state institutions.
“But the fact that they sat down for such a discussion demonstrates the great importance they attach to the issue of local debt relief and the type of financial resources they can still access at this stage.”
According to an official statement, officials in Liaoning, a northern rust belt province, met on Saturday with top bankers from 18 state financial institutions, including the Industrial and Commercial Bank of China, the country’s largest lender.
Senior officials in Hebei province and the coastal city of Tianjin conducted high-level meetings with state-run lenders, including the Bank of China, according to sources familiar with the situation.
Officials in Hebei and Tianjin are seeking to restructure outstanding off-balance sheet debt, the sources said, while those in Liaoning hope to refinance some of the debt using local state assets as collateral. Before meeting with the banks, local officials also lobbied state regulators to get their consent to approach the banks, the people said.
The stress [of off-balance sheet debt] it would push financially weak provinces to actively trade these forms of debt,” said Ivan Chung, managing director of Moody’s Investors Service.
The governments of Liaoning, Hebei and Tianjin did not respond to requests for comment. The banks declined to comment beyond their public statements.
According to a Goldman Sachs estimate, Chinese local governments have accumulated as much as 94 trillion renminbi ($13 trillion), which includes liabilities of off-balance sheet entities known as local government financial vehicles, investment firms that raise debt and build infrastructure on behalf of authorities. According to Moody’s, 3.2 trillion yuan of government bonds will have to be repaid by the end of 2024.
Last year China’s State Council, or cabinet, sent teams of officials to more than 10 of its financially weakest provinces and cities – including Liaoning and Tianjin – to examine their books.
Beijing also stepped in to provide support, placing more than 1.4 trillion RMB in special refinancing bonds to help local governments repay outstanding bonds when they mature.
These top-down efforts have avoided public default, but analysts say much remains to be done to resolve hidden debts that don’t appear on local governments’ balance sheets.
“The immediate threat of bond defaults has been mitigated,” Moody’s Chung said. “The focus has now shifted towards managing the medium and long-term debt of LGFVs which, although less likely to cause spillover effects, takes longer to manage effectively.”
In this year’s budget report, China’s central government promised to “firmly prevent any increase in hidden public debt and firmly address existing hidden debts.” Lan Fo’an, China’s finance minister, said on Wednesday that Beijing will “gradually de-risk” local government debt by cutting the number of LGFVs and pushing local governments to sell stranded assets, while offering some fiscal support.
In southwestern Yunnan, 1,153 government-funded infrastructure projects, such as highways and theme parks, have been suspended and new construction halted to limit spending and focus on debt resolution, according to a document seen by the Financial Times.
The Yunnan provincial government did not respond to a request for comment.
Financial regulators have also put pressure on banks, particularly state-run lenders, to explore restructuring local government debt. Despite facing a likely decline in profits, banks know they face a political imperative to prioritize debt resolution.
“You probably won’t see the stress [banks’] the balance sheets immediately, but this year the debt resolution work is putting real pressure on the banks,” said a banker present at one of the meetings.
“The prevailing strategy aims to defer immediate risks by trading time for breathing space.”