Dongguan, one of China’s richest cities, suspends free services as debt crisis bites

Dongguan suspends free services as debt crisis bites

Saturday, 18 May, 2013, 12:00am

Charlotte So in Dongguan charlotte.so@scmp.com

In a telling sign of the mainland’s mounting local government debt crisis, some towns in Dongguan – one of the richest cities – are being forced to suspend free public services and infrastructure projects.

In February, Shipai town terminated the free bus services that it introduced with much fanfare about two years ago. Then in March, the township government said it was reviewing a policy of providing free education to all residents aged below 25 because the government’s coffers had dried up.

The town of Zhangmutou – dubbed little Hong Kong because of its popularity as an investment and holiday destination – has scrapped an ambitious plan to build a 100-million yuan (HK$126.4 million) recreational park, leaving a large chunk of empty land in the town centre.

Many local township authorities in Dongguan are struggling to pay the salaries of their employees.

Their problems underline the magnitude of local government debt issues on the mainland.Last month, former finance minister Xiang Huaicheng told the Boao Forum in Asia, in Hainan , that local government debt could be as high as 20 trillion yuan, almost doubling the figure given in a 2011 report by the National Audit Office. Also, Fitch Ratings lowered one of its key ratings on China’s government debt in one of the sternest warnings to date over a credit build-up in the world’s second largest economy.

More than 60 per cent of the 32 townships in Dongguan now face serious financial deficits.

Dongguan was once a proud example of China’s economic miracle and a manufacturing centre of hi-tech products. At the height of its success, Dongguan towns were flush with money because of rising land prices and revenue from factories.

Many local authorities, like Shipai, offered free public services for residents. But it was hard hit as demand from the United States and Europe for products plunged. Rising salaries and high land prices also drove many factory owners to move to inland provinces.

Many construction firms in Dongguan are reluctant to take on government contracts for fear that local authorities may default.

Wong Xiaoli of Dongguan Leikun Construction said they would stop work immediately if the government failed to pay them on time.

“We got only 30 per cent of the promised payment after we finished a greenery project for a police station in Shipai,” he said. The company abandoned a landmark project in Zhangmutou because local authorities could not pay them on time.

Lin Jiang, professor of the Department of Public Finance and Taxation at Lingnan College, Sun Yat-sen University in Guangzhou, said the debt problem could not be solved by local governments.

The total debt for Dongguan township authorities is estimated to be between 30 billion yuan and 50 billion yuan.