11 Sep 2023
As China transitions towards higher-quality economic growth, it is moving away from the old playbook of loading up on more debt to invest in property and infrastructure to spur short-term growth. However, local government financing vehicles (LGFVs) have amassed large amounts of debt in recent years (chart 1), with complex interlinkages to other entities, so there are potential repercussions to the wider economy if they suffer financial distress.
Hence, a comprehensive debt restructuring plan may be needed to tackle different aspects of this problem, as mentioned in the July politburo meeting. Based on successful historical precedents, we envision that the plan could compose different measures to address different types of debt, which depend on the purpose of borrowing and project nature. These include:
For future infrastructure investments, China may aim to adopt best practices in infrastructure investment from the outset. That way, projects could be planned, executed, and managed in a way that maximizes efficiency, effectiveness, and be sustainable longer term. Careful project lifetime planning could mean better alignment in terms of spending and resources, and help to build healthier intergovernmental fiscal relations. Fiscal reform may also involve more central oversight on local and provincial government finances.
Along with the structural transition towards higher-quality growth, there is now reduced demand for infrastructure projects. This, to some extent, helps alleviate the pressure on local governments arising from reliance on land sales as a funding source. Yet, it is crucial for local governments to actively seek alternative revenue streams, as they increase public investment in soft infrastructure such as a social safety nets, including better unemployment benefits, and granting migrant workers access to public healthcare and public schools.
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