China's first-class debt ratio is lower than the international warning line, but the local first-class debt ratio is relatively high, and local debt has risks such as insufficient liquidity, uncontrolled supervision, and systemic debt crisis, which still need to be actively resolved.
The scale and composition of China's most advanced debt
Debt in a broad sense is composed of national debt, local debt and hidden debt. Explicit debts, also known as statutory debts, are debts that are borrowed and guaranteed by ** and local governments in accordance with the law and included in budget management, including national bonds and local debts. Explicit debt is mainly based on credit, debt generated through the issuance of bonds. A bond is issued by the issuer to raise funds, pays a certain percentage of interest at an agreed time, and repays the principal at maturity.
Figure 1: Bond composition system (information**: compiled by authors).
In August 2014, the newly revised budget law was passed, and the local government was qualified to issue bonds, and the replacement bonds were the main force of issuance from 2015 to 2017, and the cumulative issuance of about 122 trillion yuan of replacement bonds, replacing loans and other debts with local ** bonds; After 2017, new special bonds became the main force of issuance, and since then, the annual issuance quota has continued to rise, and the issuance scale will reach 403 trillion yuan (including issuance within the balance limit).
Correspondingly, the balance of local ** debt has also shown a rapid upward trend, with an average annual compound growth rate of 32 from 2015 to 202265%。Moreover, since 2015, the annual issuance of local ** bonds has exceeded that of national bonds, becoming the single product with the largest stock in the domestic bond market.
Figure 2: **Growth of bond issuance (Information**: China Bond Information Network).
China's first-class debt ratio is lower than the international warning line, and the local first-class debt ratio is relatively high. In recent years, China's first-class debt ratio has continued to increase, and as of the end of 2022, it is around 50%, which is still below the internationally accepted 60% warning line. In terms of horizontal comparison, at the end of 2022, China's first-class debt ratio was at a low level among major economies; However, the proportion of local ** in China's ** debt ratio is relatively high, and the local ** debt ratio is at a relatively high level among major economies；**Gearing ratio is 2138%, which is low among major economies.
Figure 3: Debt Ratio Movement and Comparison with Major Economies (Information: Wind).
**What are the risks of continued debt expansion?
1.**There is a risk that the total amount of debt will be difficult to repay
Although China's first-class debt ratio is at a low level among major economies, some provinces are under greater debt pressureChina's local ** debt is unevenly distributed, and by province, as of the end of 2022, the ** debt ratio of Qinghai and Guizhou provinces exceeded 60%.
Figure 4: Debt Ratio of Provinces, Debt Ratio = Total Debt at the End of the Period GDP for the Current Period (Information**: Southwest**).
China's local debt is mainly composed of general bonds, special bonds and a small amount of non-local debt in the form of public bonds. In recent years, the issuance scale of local special bonds has increased significantly. The proportion of special bond issuance is generally on the rise, and local budget revenue is the main repayment method of special bondsAffected by factors such as the downturn in the real estate market and the slowdown in economic growth, the growth rate of local budget revenue has slowly lagged behind the growth rate of special bond issuance.
With the increase in the scale of local ** special bonds, the solvency and risk prevention and control of special bonds have attracted much attention. Since 2018, local ** special bonds have entered the repayment period, and related problems such as the project income is less than expected, and the mismatch between the project income period and the principal and interest repayment period have gradually become prominent. In the positive role of special bonds in expanding investment and stabilizing the economy, they also face problems such as reduced efficiency of capital use and inaccurate project returns, which will affect the effect of special bond projects in stimulating investment and increase the risk of local repayment.
2.**Hidden debts are difficult to supervise and prone to runaway risks
* Implicit debt is the debt generated by the local government to bypass regulation, commitment and guarantee, and the cause of this is the contradiction between the limited local fiscal level and borrowing channels and the high expenditure on public utilities. After the implementation of the new budget law, in order to solve the problem of financial difficulties, local governments have raised funds through PPP, purchase of services, investment, commitment to repurchase the investment principal of the social capital party, and promised to the social capital party to solidify the income, or through the establishment of urban investment platforms that are not on the supervision list for financing in violation of laws and regulations. Continuously push up the debt other than the issuance of bonds, and the risk of local hidden debt appears.
With the continuous expansion of the scale of local hidden debts, due to the asymmetry of local debt information, it is difficult to effectively achieve both internal supervision and social supervision, and the types are complex, and only the financing platform is used to maintain the whole chain management of investment and financing and capital balances, which is easy to lead to problems in the follow-up management of debts and public welfare assets.
Is it reasonable to say that domestic debt is not debt?
1.Similarities and differences between domestic and external debt
Both domestic debt and external debt refer to ** debt, and their similarities lie in the fact thatBoth are forms of credit transformation, which are different from commercial credit and bank credit, but two different forms of national credit and public credit, and both domestic and foreign debts are forms of credit with the state as the main body.
The difference between domestic and external debt is thatFirst, the impact of domestic and foreign debt on domestic investment and savings is different. External debt, which is a factor of foreign inflows, increases the aggregate amount of domestic investment and savings, and also changes the structure of domestic investment and savings. The issuance of domestic debt has only changed the structure of domestic investment and savings, but has not changed the total amount of domestic investment and savings. Second, the risk coefficients of domestic and foreign debts are different. Domestic debt is a debt to domestic residents, and the risk is relatively small, while foreign debt carries great risks in the political, military, financial, and economic aspects. Third, only external debt can cover the current account deficit. Fourth, the currencies and values of domestic and foreign debts are different.
2.Why is there such a saying that "domestic debt is not debt"?
As we have analyzed above, domestic debt refers to bonds or other forms of debt instruments issued by debtors within a country, which is a legal and protected form of debtBorrowing will inevitably lead to the over-issuance of money, and borrowing will inevitably lead to repayment, which may lead to inflation and debt crisis.
Some big Vs in the field of theoretical economics have pointed out that from a legal point of view, domestic debt is a normal debt relationship, but from a macroeconomic point of view, domestic debt can be regarded as a special form of taxation. This is because when a bond is issued, it is actually committing to pay off that debt with future tax revenues at some point in the future. So, in that sense,To a certain extent, domestic debt can be seen as a kind of pre-levy on future taxes. In fact, this statement cannot be understood only from the literal meaning of "domestic debts are not debts", and it is erroneously believed that "domestic debts do not have the obligation to repay, and can be over-issued indefinitely without negative impact".
Actually,It is true that domestic debt can be diluted and repaid through additional issuance in the national currency, but the essence of a large amount of additional currency issuance in a short period of time is to dilute the purchasing power of all RMB holdersDomestic debts still need to be repaid, and the repayment funds are mainly financial funds, and the old debts can theoretically be solved by borrowing new to repay the old and over-issuing currencyCompared with "external debt", domestic debt does not involve foreign exchange and sovereignty, and its risk is relatively small, but it does not mean that it can be separated from the essence of "debt".
**Debt risk mitigation measures
The scale of local debt has grown rapidly, and the debt pressure has been increasing, and the curtain of debt has been opened in 2015 and has continued to this dayThe first round of debt was from 2015 to 2018, through the issuance of local ** bonds, to replace the stock of local debt. From 2018 to the present, the second round of debt has been strictly controlled to increase the amount of hidden debt and resolve the stock of hidden debt.
Based on the data released by the Bank for International Settlements and the Ministry of Finance of China, it is estimated that the scale of the stock of local ** hidden debts in October 2018 is between 10 trillion and 15 trillion yuan. By the end of 2022, more than one-third had been resolved. This means that the road to debt reduction in ten years has been nearly halfway, and the task of debt reduction in the later stage is still heavy.
According to Article 15 of the "Instructions for Statistical Filling of Local Full-caliber Debt Inventory" issued by the Ministry of Finance in August 2018There are six major ways to resolve implicit debts. arranging repayment of financial funds; Repayment of the equity and operating state-owned assets rights and interests; Reimbursement of project carry-over funds and operating income; Compliance is converted into corporate operating debt; repay by borrowing new to repay the old, extending the term, etc.; Bankruptcy reorganization or liquidation shall be adopted.
**Debt resolution is nothing more than controlling the increment and reducing the stock, including strictly controlling the review of special bond projects, and replacing them through the issuance of special refinancing bonds; the second is to reduce costs and extend the period, including borrowing new to repay the old, extending and other ways to replace local hidden debts; The third is to strengthen supervision and clear the market, mainly to clarify the relationship between the market and further promote the establishment of a market-oriented and modern enterprise operation mechanism for local financing platforms.
1.Optimize the risk control of the repayment of local special bonds
For the place**,The first is to optimize the procedures for disbursement of fundsEstablish a progress early warning mechanism to achieve efficient management and operation of special bond funds. The second is to strengthen the supervision and guidance of the balance calculation of the income of special bonds, scientifically guide the preparation of project income balance plans, and strengthen the inspection of the practice quality of third-party institutions. The third is to improve the information disclosure mechanismto ensure that the whole process of bond issuance, project construction, production and operation is open. Fourth, it is necessary to reasonably arrange the repayment of interest during the construction period, and expand the repayment funds of special bonds. Fifth, build a risk reserve mechanismA debt-servicing risk reserve can be established within the budget.
2.Issuance of special refinancing bonds
The issuance of special refinancing bonds by provinces and municipalities is an important measure to replace implicit debts. Generally speaking, refinancing bonds are used to repay the principal amount of maturing local ** bonds. Starting in 2020, the purpose of refinancing bonds in some provinces has been changed to "repay the best stock debt", and refinancing bonds will be opened to resolve hidden debts, which are called "special refinancing bonds" by the market. Compared with ordinary refinancing bonds, special refinancing bonds are mainly used to replace implicit debts, which will increase the balance of local ** debts, and the issuance scale is limited by regional debt limits.
The essence of special refinancing bonds is debt swapping and implicit debt explicitness, which is conducive to avoiding liquidity risks caused by debt maturity in the short term. Since the resumption of issuance, the special refinancing bonds have been issued with a maturity of 7 years or 10 years, with an average bond maturity of about 16 years, which will help the local government to smooth the debt repayment burden in a longer period, give the local government a longer time to adjust the debt structure, steadily resolve the debt risk, and better achieve the purpose of "exchanging time for space".
3.Local financing vehicles need to actively replace existing debts
There are three main forms of debt for local financing platforms: bank loans, urban investment bonds, and capital market financing such as financial leasing, project financing, and trust private placement.
Local financing platforms will first consider using debt extensions, replacements and other means to alleviate the current repayment pressure. Debt extension can help borrowers reduce the current loan amount to be repaid, reduce repayment pressure, and at the same time, avoid liquidated damages caused by failure to repay on time. Debt swaps can reduce the debt burden and optimize the debt structure by converting high-interest debt into low-interest debt and extending the repayment period of debt. Local financing platforms can actively negotiate with financial institutions, use appropriate financial instruments, and replace local hidden debts by borrowing new ones to repay old ones, extending periods, etc.
4.Further realize the separation of ** from the financing platform
From a medium- to long-term sustainability perspective, further clarification of the relationship between ** and the market is key. The substantive solution of the hidden debt problem still depends on the effective promotion of the transformation of urban investment, that is, the urban investment company realizes market-oriented transformation through mixed reform, optimization of business direction and business model, integration and reorganization, etc., builds its own hematopoietic capacity, and truly realizes the modernization of local fiscal governance.