Chinese Communist Regime Issues $585 Billion in Local Government Bonds, Half Used to Refinance Debt

China’s local government debt has reached a staggering 92 trillion yuan ($12.58 trillion) as of late 2023, according to public data. To address this issue, the Chinese communist regime has issued approximately 4.2 trillion yuan ($585 billion) in local government bonds in the first seven months of this year. However, nearly half of these bonds are refinancing bonds used to pay off old government debts. Li Hengqing, a senior accountant and economist at the Institute for Information and Strategic Studies in the United States, highlights that the 2 trillion yuan ($279 billion) refinancing bonds are primarily used to repay interest on the debt. He further explains that the local governments’ ability to repay debts has significantly declined, resulting in the need to borrow new debt to pay off old debt.

The Chinese Communist Party’s Ministry of Finance reported that in May alone, 903.6 billion yuan ($126 billion) in bonds were issued, marking the highest amount in a single month for the first half of the year. Out of the total 4.2 trillion yuan ($585 billion) in bonds, approximately 2.2 trillion yuan ($307 billion) are new bonds. Of these, 1.8 trillion yuan ($251 billion) are new special bonds, while 0.4 trillion yuan ($55.7 billion) are new general bonds. The funds from the new special bonds have been primarily invested in municipal and industrial park infrastructure, accounting for approximately 34% of the total investment. Another significant portion is allocated to transportation infrastructure such as railways, government toll roads, and rail transit.

The reliance on infrastructure investment is a result of the Chinese Communist Party’s external economic and energy expansion being blocked by the Western world. This external pressure has led local governments to focus on internal economic circulation. However, Yu Yaw-shun, an assistant professor of Finance at Chung Hua University in Taiwan, points out that this heavy reliance on infrastructure investment has caused economic growth rates in many coastal provinces to decline. These provinces now rely on investing in inland provinces to maintain their internal circulation, which has encountered significant challenges.

One concerning aspect of China’s local government debt is the hidden debt held by local government financing vehicles (LGFVs). The CCP’s Ministry of Finance reported that local government debt was 40 trillion yuan ($5.57 trillion) as of December 2023. However, Goldman Sachs estimated that the accumulated debt of local governments, including the debt of LGFVs, was as high as 94 trillion yuan ($13 trillion). LGFVs are considered a black hole in China’s financial system, and the International Monetary Fund estimates that China’s total debt held by LGFVs has skyrocketed from 57 trillion yuan ($7.9 trillion) in 2022 to 66 trillion yuan ($9.1 trillion) in 2023. While the principal of the debt on LGFVs is often rolled over by borrowing new debt, the interest on the debt needs to be repaid.

This mounting debt crisis has not only impacted local governments but also Chinese banks. Reduced liquidity resulting from the CCP’s massive government debt and bond issuances has dragged Chinese banks into a debt crisis. Li Hengqing warns that this vicious circle is becoming more critical, and the collapse of the Chinese financial system is drawing closer. International financial agencies and institutions are increasingly concerned about China’s debt, which has led to a decline in foreign investments and the departure of foreign companies from the country.

In conclusion, China’s local government debt has reached alarming levels, with the issuance of bonds being used primarily to refinance old debts. The Chinese Communist Party’s heavy reliance on infrastructure investment as a means of internal economic circulation has led to declining economic growth rates in coastal provinces. Additionally, the hidden debt held by local government financing vehicles poses a significant risk to China’s financial system. The mounting debt crisis has not only affected local governments but has also dragged Chinese banks into a debt crisis, reducing liquidity and posing a threat to the entire financial system.