HomeBusinessChina's cities are in debt, but they keep racking up debt

China’s cities are in debt, but they keep racking up debt

In 2015, when Shangqiu, a central Chinese municipality the size of Kentucky, laid out a plan for the next two decades, it positioned itself as a transportation hub with an extensive network of railways, highways, and waterways.

By the end of 2020, Shangqiu had built 114 miles of high-speed railway, and today, several national railways make stops in the city. By 2025, Shanghai wait the coverage of its road network has increased by 87 percent. The city is building its first two airports, three new expressways and enough parking space for an additional 20,000 spaces.

The splurge on infrastructure is far from over. On February 23, the secretary of the Shangqiu Communist Party reiterated the vision of the city as a logistics powerhouse when celebrating a new partnership with a state investment company, which could help Shangqiu borrow money for even more projects.

That morning, the city’s bus operator announced that it would have to suspend services due to financial difficulties. The pandemic hit it hard, the company said, and the Shangqiu government failed to provide the subsidies it had promised. As a result, the company had not paid its employees for months, it could not even afford to charge its electric buses. Within hours of publishing its ad, the company removed it, after making national headlines and intervention by the Shangqiu government.

China is full of Shangqius these days. As part of the ruling Communist Party’s overall push for economic growth this year, local governments already in debt from loans to pay for massive infrastructure are taking on additional debt. They are building more roads, railways and industrial parks even though the economic benefits of that activity are dwindling. In their struggle to find the money to finance new projects and interest payments on old ones, cities are cutting public services and benefits.

Shangqiu is one of more than 20 towns and cities in China where bus services have been shut down or jeopardized because local governments failed to provide the necessary operating funds. Wuhan and other cities cut health insurance. still others cut pay of government workers. Many local governments in Hebei province, which borders Beijing, could not pay heating subsidies for natural gas during the winter, leaving residents shivering during an unprecedented cold snap.

For nearly three decades, China’s local governments have been the envy of the world. They seemed to have unlimited resources to build airports, highways, and industrial parks, many of which were financed by land sales.

Now, many of them are in fiscal disarray. In the country’s determined pursuit of its “zero covid” policy, local governments exhausted their coffers to comply with strict test, quarantine and lockdown rules. Businesses in trouble are paying less in taxes. After hit after hit of government crackdown, developers are reluctant to buy land.

“Governments don’t have money to spend on basic services if land sales don’t recover dramatically,” said Victor Shih, an associate professor of political science at the University of California, San Diego. “Local government, especially in third and fourth tier cities, will continue to struggle to meet many of their budget obligations.”

According to official data, China’s 31 provincial governments owed about $5.1 trillion by the end of 2022, an increase of 66% over the previous three years. An International Monetary Fund report puts the figure at 9.5 trillion dollars, equivalent to half of the country’s economy.

But from the enthusiastic way cities have embraced investment, China’s old playbook for economic growth, it’s hard to say they’re deeply in debt.

The state media is full of breathless reports about new projects. Guangdong, China’s largest province by economic output, announced it would invest $1.2 trillion in 1,530 projects by 2023. Henan, the province that includes Shangqiu, saying it would spend $261 billion on 2,500 projects.

The problem is that these governments do not have the money.

In China, where the government owns virtually all the land, the main source of income for many towns has come for years from leasing or selling property to developers. But revenue from land sales fell by more than a fifth last year, according to the Finance Ministry. All 31 Chinese provincial governments ran deficits due to “zero covid”. Two-thirds of local government entities borrowing money exceeded unofficial debt thresholds set by Beijing, with their outstanding debt exceeding 120 percent of their revenue in December, according to global S&P.

In Shangqiu, the government did not specify how it would finance its 701 projects by 2023. He did say that last year his revenue from land sales was half of what the city was targeting, and that he had spent $1 billion on debt service. Put another way: Shangqiu used more than a third of its tax revenue to pay interest on its debt. This year, officials are pinning their hopes on a big jump in land sales and some growth in tax revenue.

But Shangqiu does not plan to spend the money on public services. Instead, the city plans to cut spending on education, health care, job protection, transportation and many other public services, according to budget documents on its website.

“We should protect and enhance the livelihood of the public based on our economic growth and financial health,” the documents said.

China is full of wasteful infrastructure that the government likes to brag about, but that doesn’t meet the most pressing needs of the public.

The Chinese government likes to say that the country has the longest and fastest high-speed railways in the world. But except for a couple of lines connecting the megacities of Beijing, Shanghai, Guangzhou and Shenzhen, most lines are operating below capacity and at heavy losses. About 80 percent of China’s high-speed railways built in the past decade were built in remote and poor regions, China State Railway Group said last year.

Zhao Jian, a professor at Beijing Jiaotong University, warned in an article that high-speed railways could become the “gray rhino” that crushed the Chinese economy because many local governments had borrowed heavily to build them. But most of those railways move people, not cargo. Therefore, they would only make sense in densely populated areas where people were willing to pay more for speed.

Local leaders are interested in infrastructure projects because their financial reward, though minimal, is immediate: people get construction jobs and companies get construction contracts. This short-term approach dominates China’s political system, where cadres fan out to race toward the goal set by their leader regardless of the financial or human cost.

The Shangqiu government boasts that there is about 150 square feet of green space for each of the 2.3 million residents in the city’s central municipal area. One of Shangqiu’s biggest infrastructure projects this year is a wetland park. After building many roads to nowhere, local governments have been spending heavily on urban beautification projects in recent years.

It’s good to have green spaces for everyone. But like most inland Chinese cities, Shangqiu is not rich. His college grads complain on social media that it’s hard to find a job that pays more than $300 a month. Your basic pension provides your seniors $17.80 a month, after an increase of $1.50 this year.

Many Chinese who are at least 60 years old live on pensions like this. According official data, in 2021, $54 billion in basic pensions were distributed to more than 162 million people, or about $28 per person each month on average. Residents would probably prefer the government to spend on unemployment protection, bus service, and welfare rather than high-speed rail and green space.

Shangqiu is far from being an exception.

A resident of Pucheng, in the northwestern province of Shaanxi, She complained on the local government’s online message board in February that there was no bus service between the center and the train station.

“This is the most basic public service,” wrote the resident, who signed under the name Li Hongbo. “I felt that people’s livelihood has deteriorated. I hope the leaders can pay attention to it.”

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