Under the pressure of heavy local debt, Guizhou was the first to shout “I can’t do it.”
Repaying debt is impossible, and resolving debt is also impossible
This announcement is very frank and also very skillful.
First, the three cities and one district listed in the announcement are the economic essence areas of the province. Guian is a national-level new district, and its relationship with Guiyang is similar to that of Pudong New Area and Shanghai. Zunyi is the second largest city in the province in terms of economy, with a GDP of 440.1 billion yuan in 2022, second only to Guiyang, the provincial capital, with 492.1 billion yuan. Bijie’s GDP is 220.7 billion, ranking third in the province. Liupanshui’s GDP of 150.3 billion ranks sixth in the province, but its transportation conditions and industrial base are superior to the two autonomous prefectures ranked fourth and fifth. If the economic essence of a province is “extremely difficult”, the rest can be imagined.
Repaying debt is obviously impossible, so there is debt resolution. If debt resolution is also “extremely difficult”, then rely on “begging”? However, under the principle of the Ministry of Finance’s “whoever’s child takes it”, “begging” seems to be unspeakable, and can only seek “intellectual support”.
In fact, “intellectual support” has already been in place. The restructuring plan of Zunyi City Investment’s 15.6 billion yuan loan extension for 20 years at the end of last year has already exceeded the limit of normal intelligence. What other intellectual support can there be? It’s about intellectual support, but what’s on your mind is the printing press. However, the data just released by the central bank shows that the M2 balance increased by 12.7% at the end of March, and the printing press is already working overtime. Can we still count on it?
Guizhou has put the seriousness of the problem on the table, which is not a bad thing. Only when the bad news is exhausted can there be stable expectations. If you can’t see the seriousness of the problem, you can’t make up for the loss.
Concentratedly drawing circles and dispersedly borrowing debts
One of the important reasons for the accumulation of Chinese local debts is the severe lack of transparency in the broad fiscal system. Within and outside the table, platform state-owned enterprises, provinces, cities, districts, and counties, inside and outside, up and down, there are a bunch of fancy accounts. Taking Guizhou as an example, what is the scale of the broad local debt? There is still no public and accurate statement. Whether the debt ratio is the 60% or so that has been displayed for many years, or the 155% announced at the end of 2020, or even more, it is unknown.
Perhaps the Research Center of the Guizhou Provincial Government cannot say how big this debt burden is. Because the money was borrowed at various levels and through various channels under various names, and many of them deliberately avoided the attributes of broad local debt when borrowing. When it comes to repaying money, the banks are asking the government for money, and can only be passively “consolidated”. Therefore, if the investigation team of the Provincial Research Center does not go down and take a look, they will not know to what extent the “raising of Gu” has been raised.
Chinese society generally believes that the government’s strong administrative centralized decision-making can avoid the market’s “decentralized fallacy”, but the real situation of the accumulation of local debts has broken this imagination. The huge local debt is very dispersed. Each level of government in provinces, cities (prefectures), and districts (counties) can have several city investment financial platforms. Each city investment can borrow money with the government’s credit endorsement. In addition, some local state-owned enterprises also participate in the financial game of broad local debt.
The debt-raising led by the administration lacks market risk awareness. Those local financial platform enterprises that have nothing but the government’s credit endorsement, neither have the safety redundancy to withstand risks, nor do they have the risk awareness of economic accounting. The planning department is responsible for drawing circles on the map, and the local financial platform is responsible for finding money. Anyway, the higher-ups dare to draw a big circle, and the lower-level dares to borrow as much money. This kind of debt-raising that is “task-driven” rather than “market-driven” is strange if it doesn’t go wrong.
Local debts are accumulated in this way, both concentrated and dispersed. Concentratedly drawing circles and dispersedly borrowing debts, the concentrated fallacy and the decentralized fallacy are superimposed, and the efficiency of digging holes is more than doubled?
From drawing circles to borrowing debts, there is only internal audit process supervision. Anyway, the debts are in different names and in different pockets. The system is deceiving each other up and down, and the outside world is completely unaware. Many people even have the illusion that “the government can conjure money out of thin air”. In fact, where does the money come from out of thin air? What is borrowed must be repaid, and if it cannot be repaid, a greater price must be paid.
Guizhou’s announcement to the world that “I can’t do it” has broken the illusion of some people that “the government is omnipotent”, which is good.
In dealing with local debt, we cannot be “soft-hearted”
In the financial game of local debt, banks are not innocent victims either. As financial institutions, banks are important nodes in economic accounting and should evaluate debtors according to strict risk control standards. However, the blind faith in administrative power and the omnipotence of the government has disarmed the banks’ risk control.
If the banks had basic risk awareness, there would not be the current mess of “debt resolution”. Guizhou Province has a population of less than 40 million and a GDP of barely over 2 trillion yuan. Economic weakness is not a secret. Moreover, Guizhou Province’s debt ratio has been high for many years, with a debt ratio of about 60% for many years, ranking first in all provinces and cities in the country. Fiscal capacity has been highly overdrawn, why do banks dare to borrow? Dushan County, with an annual fiscal revenue of 1 billion yuan, can borrow 40 billion yuan from financial institutions to build buildings. It’s incredible. The risk control system is completely out of order. What kind of financial system is this? Being criticized for “no system”, is it wronged?
Now that the debt risks are exposed to the world, what should be recognized must be recognized. Local governments must recognize the accounts, and banks must also admit defeat. There is no intellectual support that can bear this big order, and don’t even think about relying on the printing press to fill the hole.
The huge volume of broad local debt, more than 60 trillion yuan, even if half of it is a hole, corresponds to more than 30 trillion yuan of currency. If this is to be filled with printing money, it will inevitably lead to an explosion of M2. If the risk spreads to the currency, it will really become a systemic risk outbreak, and the consequences will be unimaginable. Therefore, the disposal of local debt cannot be “soft-hearted”. The bad debts should be written off, and the bankruptcies should be bankrupt. Even if the price of a hard landing is paid, it is always better to stop the loss in time than to land late after the snowballing.
If the bad news is not exhausted, the expectation cannot be stable.
The local government debt crisis involves many problems. The most fundamental problem is that it violates economic laws, disregards the actual economic foundation, and blindly believes in government investment to drive the economy. Through large-scale transfer payments and massive borrowing, hot money poured in, and the GDP data of Guizhou in the past few years was “decorated” very well, and even during the epidemic, it still maintained a relatively high nominal GDP growth rate. However, this kind of good data burned out with money is not supported by actual economic benefits. Just entering the debt repayment cycle, the bare bones are revealed.
Guizhou’s economic foundation is weak, and the nominal GDP growth of 1 or 2 percentage points is not enough to cover the debt growth. For example, if you sow a hundred catties of seeds in saline-alkali land and harvest fifty catties of grain, what is this real growth? This kind of practice that violates economic common sense can bypass the fiscal discipline of all levels of government and the risk control system of the financial system, and dig a debt pit under the eyes of everyone.
Violating economic laws will inevitably pay a price and cannot be avoided. Guizhou’s public admission of “inability to resolve debt” is also a courage to face the facts, and it is a good start to clean up the mess. Then, the only thing left is to clean up the mess with greater courage, pay as much as you owe, and it cannot be avoided, nor can it be avoided.
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