China’s Local-government debt: Bridging the fiscal chasm; Fancy infrastructure is one example of local-government largesse. Which province is deepest in debt as a result?

China’s Local-government debt: Bridging the fiscal chasm; Fancy infrastructure is one example of local-government largesse. Which province is deepest in debt as a result?

Feb 22nd 2014 | HONG KONG | From the print edition

CHINA’S provincial administrations are often referred to as “local” governments. But the phrase does not do them justice. The province of Guangdong, for example, boasts more than 105m people and a GDP worth more than $1 trillion. Only 11 countries (including China itself) have a bigger population and only 15 have a larger economy.

Equally impressive is the scale of provincial debts. At the end of 2013 China’s national auditor revealed that the liabilities of local governments had grown to 10.9 trillion yuan ($1.8 trillion) by the middle of last year, or 17.9 trillion yuan if various debt guarantees were added. That was equivalent to about a third of China’s GDP. These “local” debts, in other words, had grown fast enough to become a national burden and an international concern.

The audit documented the size of the problem, but revealed little about its location. The debts were all discussed at an aggregate, countrywide level. No provinces were singled out for blame or praise. In the past few weeks, however, almost all of the provincial-level governments have published audits of their own. As well as shedding light on the problem, this information may help to solve it. In principle, the least provident governments are now exposed to public scrutiny. Fiscal shame may help prevent a fiscal fright.

But identifying the most indebted province is not as easy as it sounds. The figures can be sliced and diced in a variety of ways. The coastal provinces of Jiangsu (just north of Shanghai) and Guangdong (just north of Hong Kong) owe the most, accounting for 14% of the total between them. But these two provinces also have the largest economies, generating over 19% of the country’s GDP.


Relative to the size of their economies, the poor western provinces of Yunnan, Qinghai and Gansu bear some of the heaviest burdens, along with the western municipality of Chongqing, which is renowned for its heavy public investment (see chart). The province with the biggest fiscal chasm to cross, however, is Guizhou (whose impressive Balinghe bridge is pictured above). It had liabilities in mid-2013 equivalent to over 80% of its GDP over the previous four quarters.

These figures include money China’s provincial governments have borrowed themselves and other institutions’ debts that they have guaranteed. Sometimes this debt is guaranteed explicitly. Often, the backing is implicit. By the end of 2012 Chongqing had explicitly guaranteed debts worth 18% of its GDP. Gansu, for its part, had implicitly backed borrowings worth 20%.

These guarantees are what accountants like to call “contingent” liabilities: obligations a government must only bear if bad things happen, such as an infrastructure company failing or a local hospital going under. What are the odds that these hypothetical fiscal dangers will materialise? On average, provinces expect the payout ratio to be about 23%. If these guarantees are booked at their expected cost, rather than their full face value, Gansu’s debt burden falls dramatically from 44% of its GDP to only 19%. Chongqing’s debt burden also falls from 59% to 38%.

Even if these guarantees do not come back to haunt China’s provinces, their debts look heavy compared with the taxes they raise. The direct debts of Yunnan and Qinghai, for example, amounted to over 260% and 370% of their budget revenues in 2012. Fortunately China’s provinces do not have to rely on their budget revenues alone. All of them benefit from a variety of other funds, including transfers from the central government and land sales. Up-to-date information on these fiscal lifelines is not easy to come by. But their size can be inferred from other ratios presented in the provincial audit reports.

They imply that off-budget revenues can loom large indeed. In some provinces, they were worth over 30% of GDP in 2012. Smaller economies collect a disproportionate amount of such revenues: in Qinghai’s case, they appear to have exceeded 50% of GDP. In bigger economies like Guangdong and Shandong, they are worth only about 8-10% of GDP.

These extra fiscal resources make a big difference to the debt burden in some of China’s smaller provincial economies. Guizhou’s debts, for example, are the heaviest in the country relative to its modest GDP. But when its expected liabilities are weighed against its disproportionately large fiscal revenues, it is no longer the most improvident locality. That dishonour belongs instead to the capital, Beijing, which expects its debts to amount to a whopping 99.9% of its consolidated fiscal revenues. Beijing is also the jurisdiction with the highest direct debts per person. It is the capital of improvidence.

This may be just as well. Any solution to China’s local-government debt will require the central government to shoulder some of the burden. Beijing, the metonym, will need to help tidy up the fiscal mess exemplified by Beijing, the place. Perhaps it is a local problem after all.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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