All politics is local. But all debt is national when local IOUs contribute to a country’s total borrowings and reduce its creditworthiness. This explains why Communist party high-ups have told Baotou, a city in inner Mongolia, to stop building a metro. Central government is pursuing a deleveraging drive, conscious that local debt is one of its toughest challenges.
Local governments have been spending more than they collect in tax since a 1994 liberalisation. According to analysts at Fitch, a rating agency, local government borrowing was the main driver of the expansion of non-financial sector debt to 2.5 times gross domestic product in the five years to 2015.
With central government curbing direct borrowing, local government has resorted to land sales. The western boom town of Chongqing and the resort island of Hainan in the south have the highest proportion of fiscal revenue tied to real estate, at more than half. The median is two-fifths. Borrowing by state-owned vehicles with implicit guarantees is another workaround. Structures such as the Rmb2.3bn ($346m) Beijing State-Owned Asset Management Company, account for a sizeable chunk of corporate debt.