China’s cities are on the verge of a debt crisis

As China continues to race towards progress and modernization, many cities are on the brink of a debt crisis that is threatening their stability and foundation. Cities have taken on significant debt loads to fund these projects, putting them in dangerous financial situations that seem impossible to escape from. This alarming trend has sparked a debate about the negative effects of rapid development and how to protect the people from its potential devastation.

1. China’s Debt Dilemma

Understanding China’s Debt

China is currently facing a highly concerning debt crisis. A number of aspects have resulted in the current problem, including:

• Over-investment in state infrastructure
• Rampant credit expansion during 2009-2010
• Holding onto foreign exchange reserves

The significant debt levels that have arisen challenge the Chinese government to find ways to bring debt levels down without compromising on economic growth. It is a difficult dilemma from which there are no easy solutions; each possible solution needs to be weighed carefully.

Ways to Tackle the Dilemma

In order to tackle the debt dilemma head-on, various approaches need to be taken simultaneously. These need to include:

• Acknowledging the detrimental effects of over-investment
• Reducing the rash credit expansion
• Releasing foreign exchange reserves back into the global economy

However, the underlying cause is much deeper, and significant economic reform is necessary in order to turn this situation around. The government will have to carry out long-term deficit reduction programs, target overly ambitious investment plans, and review short-term financing strategies. Only then will the situation start to see an upturn.

2. Looming Financial Hazard for Chinese Cities

China’s glittering cities face a new financial hazard, that of local government debts. The levels of public debt have become a cause for concern, especially as the Chinese economy slows. In the shadow of this financial pressure, Chinese cities are now struggling to pay off their looming debts.

For many Chinese cities, poor urban planning and ambitious public works schemes are the root cause of rising debt levels. Rampant corruption and efforts to purchase buildings and invest in companies have also contributed to their financial difficulty. Though the Chinese government outlined new measures to help manage local government spending and urged tighter supervision of debt issuances, many cities are still struggling under the burden of their debts.

• Poor Urban Planning: Many Chinese cities suffer from poor urban planning which has lead to a heavy debt burden.
• Ambitious Public Works: Chinese cities have made ambitious investment decisions in public works which have increased the level of public debt.
• Corruption: Rampant corruption amongst officials has also been responsible for escalating local government debts.

3. Understanding China’s Urban Debt Quagmire

With increasing population, China’s urban debt continues to sky rocket to unsustainable levels. As the world’s second-largest economy, Chinese cities are starting to feel the pressure of their rapidly developing infrastructure and infrastructure projects. Here’s what we know about China’s urban debt quagmire:

• Unsustainable Levels of Debt: Urban debt in China is estimated to reach 31.5 trillion yuan ($4.52 trillion) by 2020. This level of debt could pose serious risk to the Chinese economy.
• High-Interest Rates: High interest rates have added to the strain on China’s urban debt. The debt-to-gdp ratio in China is around 42.5 percent, far higher than the global average.

China has attempted to address rising urban debt with programs like the “three-year action plan for the treatment of local government debt risks”. The plan is designed to reduce the likelihood of default on loans. The Chinese government has also called for better risk management from local authorities.

4. Solutions to China’s City Debt Crisis?

Policymakers around the world have been challenged with finding solutions to China’s city debt crisis. The situation has been likened to a ticking time bomb due to the shear size and scale of the debt problem. In order to mitigate the danger and bring about a lasting solution, China must look to a range of possible measures.

Firstly, the Chinese Government should continue to look for ways to restructure and consolidate the debt that has been held by the city governments. A comprehensive debt-relief plan could help to reduce the total burden and make it easier for cities to manage debt repayment more effectively. Other steps such as providing more assistance to local government by way of loan programs, subsidies, and tax incentives could all go a long way to help.

• Restructuring/Consolidation of Debt
• Loan Programs
• Subsidies & Tax Incentives

The debt crisis in China’s cities is looming large – it is a reality that needs to be taken seriously as soon as possible. The influx of foreign investment could be a potential remedy, however ultimately it’s up to the Chinese economy to find a way out of this perilous situation. Only time will tell how this tremendous burden will be handled.