Local authorities in other countries can get into financial difficulties too. It’s not just Woking, Thurrock, Slough and Croydon that have been making headlines recently. Guizhou, a region in China, has been in the press over concerns about high debt levels, a likelihood of default and the possibility of a bail-out from the central government in Beijing. There is also widespread concern about the Chinese local authority sector as a whole.
Guizhou is a relatively poor, obscure and landlocked province in central China. Its government has invested heavily on improving transport links that mean Chengdu can be reached in three hours and Hong Kong in seven. It has also invested in improving the lives of its residents by redeveloping extensive shanty towns throughout the region. However, government debts have now reached 130% of GDP within the area and are widely believed to be unaffordable. It is likely the region will need to significantly restructure its debt, default and/or receive central government help.
Unlike in the UK, the US and many other countries, local authorities in China cannot directly issue bonds and there’s no Chinese equivalent to the PWLB lending facility. ‘Local Government Financing Vehicles’ or LGFVs are commonly used to raise funds: these are not very transparent investment companies which sell bonds to the wider market. Some are solely to finance public expenditure to be repaid from taxes, others combine funding public works with commercial enterprise such as property development. The International Monetary Fund estimates that the total debt owed by LGFVs is around 66 trillion yuan (£7.5 trillion) which is around half the size of China’s economy.
The sheer size of debt and increasing proportion of revenues going into debt servicing are increasingly worrying investors. There is concern that poorer areas such as Guizhou may be the canary in the coal mine to more widespread problems. A property crash in China has been making things worse as it has reduced local government taxation revenues from property transactions and alternative sources of revenues for LGFVs. Clearly the pandemic and the not-as-strong-as-was-hoped-for economic rebound have also not helped the situation.
Feelings as to Beijing’s propensity to help struggling local administrations are mixed although they are unlikely to take the ‘automatic help provided’ approach that has been adopted in the UK. It is felt that the Chinese Communist Party rulers may want to avoid the moral hazard of bailing out regions that have been seen as spend thrift. However, if there is widespread fear of significant contagion or of local authority defaults creating problems in the wider economy they may feel more of a need to step in.
Is there anything that local authorities can learn from China’s problems or any comparisons that can be made? I won’t make any wider comments on how local government finance works in China because it is not an area I am familiar with. However it is probably fair to say that problems with municipalities’ financial positions in China may be more widespread than they are in the UK. Despite the aforementioned high profile cases, most authorities in the UK have sound finances and do not require central government intervention.
There is something to be said about transparency being an advantage here. Local authority financial statements in the UK may be long and too complicated for most people to understand, but at least they do give an accurate and detailed view of the authority’s situation for those that do want to find this out. Debt owed by local authorities can be seen clearly on their balance sheets. Local authorities in the UK can borrow themselves in their own name. China’s large shadow banking sector (about 40% of the country’s loans are thought to be outside of traditional financial institutions) and the nature of LGFVs form a very different backdrop that is likely to have contributed to failures in Guizhou and elsewhere.