Local government debt is now so unwieldy in China that some desperate district governments have turned to the private sector for help to pay their employees.
The Chinese language magazine of state-run Xinhua news agency reported on Friday that the city of Ordos, in northern China’s Inner Mongolia, has accumulated almost six and a half times its annual revenue in debt—or 240 billion yuan ($39 billion). Some of the city’s districts have borrowed from businesses to meet salary obligations.
More Signs of Strains in Local Economy
The report adds to signs of strains in an economy that probably decelerated for a second straight quarter as overseas and domestic demand slowed and Premier Li Keqiang reined in credit growth. China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the country’s biggest shipyard outside state control, said last week it’s seeking financial support from the government after orders plunged.
Causes of Accumulated Debt
The city has already developed an infamous reputation as the biggest ghost town in china. When large deposits of coal were discovered about 20 years ago, developers moved in and built a shining new city capable of housing hundreds of thousands of people, complete with skyscrapers and a vast square called Genghis Khan Plaza. But the people didn’t follow and Ordos began to accumulate debt. Two decades on, the mines are struggling, as demand for coal has slumped amid China’s economic struggles.
China’s Liquidity Crunch Pinching Cities Like Ordos
China’s liquidity crunch may be worsening the debt problems of cities like Ordos. Interbank lending rates spiked last month, starving the financial system of credit, and the central bank initially refused to intervene. This may have been a crude measure to strangle small, highly indebted banks, or it may have just been bad management. Now Beijing has to contend with the threat of default in cities like Ordos, which could take the country’s debt crisis to a whole new level.
China’s GDP may have expanded 7.5 percent in the April-June period from a year earlier, according to the median estimate of 31 analysts surveyed by Bloomberg ahead of a July 15 release by the statistics bureau. That would be down from 7.7 percent in the first quarter and 7.9 percent in the October-December period.
Local Government Debt Pushing China’s Crisis to a Whole New Level
Vice Finance Minister Zhu Guangyao said last week that China should be on “high alert” to risks in local government debt.
Ordos had gross domestic product of 365.7 billion yuan in 2012 and 2 million residents, according to the local government, giving it a per-capita GDP close to Hong Kong’s. The magazine cited an unidentified person close to the city government for the debt number.
The government’s debts include delayed payments to builders as well as loans from companies, the magazine said.
Ordos’s Dongsheng district has the most debt with at least 120 billion yuan, followed by Yijinhuoluo district with about 70 billion yuan, according to the article. The expansion of government payrolls is another reason for Yijinhuoluo’s debt, the magazine reported, citing an unidentified local government employee.