Risks of China's local debt grows as govt scales back COVID-19 stimulus

As China has started scaling back the COVID-19 stimulus worth trillions of yuan launched last year, local government debt and corporate bond defaults are emerging as the prime financial risks for the communist government.

Chinese authorities are currently on high alert for financial problems, particularly in some western and northern regions, whose ability to repay credit is strained amid stimulus tapering and a decline in revenue due to the pandemic and government-mandated tax cuts, South China Morning Post (SCMP) reported.

"Local debt issues, which reflect the resource-funded growth model, are problematic," said Wu Xiaoqiu, a professor of finance at Renmin University of China, said at a seminar last week.

Fears of a debt bubble in China have already put the brakes on new developments, particularly those with high liabilities.

Earlier last month, the provincial government of Shaanxi in western China said it had suspended construction on an intercity high-speed railway network, which is estimated to be worth 50 billion yuan, after "considering fundraising and risk prevention".

Shaanxi reported outstanding debt of 743.3 billion yuan by the end of 2020, SCMP reported citing China Local Government Bond Market Access, a newly launched government website to track public debt. The figure represents about 28.4 per cent of China's GDP.

Beijing set a much lower-than-expected growth target of 6 per cent for this year, despite estimates from private economists that expansion could reach 8 per cent.

Many economists and policy advisers have warned that increasing debt in China could weigh on the recoveries of some financially vulnerable regions.

However, the United States and some European countries have also loosened their financial conditions to fight the economic effects of the virus, SCMP reported.

( With inputs from ANI )