Text/People's Bank of China Luo Jie, Assistant Research Commissioner and Senior Economist of Chongqing Sales Management Department
Since the beginning of the 21st century, the debt of mainland urban investment has continued to grow, and there is a "cat and mouse game" interaction between debt governance and the behavior of urban investment companies. Based on the history of institutional changes of urban investment debt, this paper further analyzes the mechanism of urban investment debt on the economy, compares the heterogeneity of urban investment debt and the efficiency of debt utilization, and puts forward relevant suggestions for preventing and resolving urban investment debt risks.
In recent years, the scale of mainland urban investment debt has continued to expand, coupled with the impact of the repeated new crown epidemic and the cold winter of the real estate market in 2022, the financial resources of local governments have been weakened to a certain extent, and the risk of default of local urban investment debts has been further revealed. Local governments face tests and choices between economic development and transformation, curbing new debts, and properly disposing of existing debts.
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At the end of 2022, the balance of standardized bonds (urban investment bonds) of various urban investment companies under the Wind caliber reached 13.2 trillion yuan, which was 4.2 times that of the end of 2014 before the implementation of the new Budget Law, with an average annual compound growth rate of 17.4%. Urban investment debt includes both standardized bonds (urban investment bonds) issued by local urban investment companies and non-standardized debts. From the perspective of demand and supply, the driving force for the sustained growth of urban investment debt mainly comes from two aspects: first, under the "championship" model of regional competition and local official promotion, local governments need to borrow through urban investment companies to break through the original budget constraints and promote regional economic growth and development; Second, the supply-side factors of financial institutions, such as the dependence of financial institutions on government credit and real estate credit, has aggravated the debt problem. As for the relationship between debt and economic growth, from the existing literature, it is generally believed that debt and the economy have a "U" shaped relationship, moderate debt has a promoting effect on the economy, and after exceeding the critical point of a certain debt scale, debt has a retreat effect on the economy. On this basis, this paper further analyzes the mechanism of urban investment debt on the economy, and compares the heterogeneity of urban investment debt and the efficiency of debt utilization, so as to make suggestions for preventing and resolving urban investment debt risks.
The history of institutional change in the urban investment debt problem
The problem of local government debt on the mainland has a relatively long history. Since the beginning of the 21st century, in response to the 2008 international financial crisis, local financing platform companies have introduced policies and measures such as assuming financing functions, the amount of loans has increased, urban investment bonds have expanded rapidly, and the scale of local government debt has become larger and larger. Since then, despite the following stages of governance, the scale of debt has continued to grow due to institutional reasons and the complexity of the problem.
The first stage was marked by the issuance of the Notice of the State Council on Issues Related to Strengthening the Management of Local Government Financing Platform Companies (Guo Fa [2010] No. 19), and the main governance measures were to classify and supervise the company's platforms and restrict financing platform loans. At this stage, bank loans were restricted, but the era of shadow banking was opened, and the scale of shadow banking and urban investment bonds expanded rapidly through detour bonds and non-standard financing.
The second phase was marked by the Opinions of the State Council on Strengthening Local Government Debt Management (Guo Fa [2014] No. 43) and the new Budget Law, which came into effect in 2015, and began to "build nullahs and block dark roads". Local governments replaced existing debts with general bonds and special bonds (a total of 12.5 trillion yuan from 2015 to 2018), while divesting platform companies from their government financing functions. Despite the success, non-standard public-private partnership (PPP), government procurement of services, special construction funds, government investment funds and other borrowing methods rose during this period, and urban investment bond issuance continued to expand.
The third stage was marked by the issuance of the Opinions of the CPC Central Committee and the State Council on Preventing and Resolving the Hidden Debt Risks of Local Governments (Zhongfa [2018] No. 27), marking the start of the work of identifying and resolving hidden debts. At this stage, the concept of hidden debt was proposed for the first time, defining local government hidden debt as "debt borrowed by local governments directly or by promising to repay with fiscal funds and illegally providing guarantees beyond the statutory government debt limit", and it is strictly forbidden to add any form of local hidden debt. Urban investment companies raise funds in the form of market-oriented business entities after the transformation of financing platforms, and through the issuance of urban investment bonds and other non-local government bonds. In practice, due to the close relationship between urban investment companies and local governments and the incomplete divestment of debts, the market generally believes that urban investment companies are the main carriers of local governments' hidden debts, and often take the balance of urban investment interest-bearing debts as an approximation of the scale of local hidden debts. As of the end of the first quarter of 2023, the balance of interest-bearing debt of urban investment under the caliber of the flush financial data terminal reached 66.7 trillion yuan.
The fourth stage is a new round of governance marked by strict control of hidden debt increments from the stabilization of the economy in 2021 to the present. At this stage, the management of urban investment bond issuance was strengthened, and the working capital loans of urban investment companies were also tightened. At this stage, local government financial resources were affected by the downward pressure on the economy caused by repeated epidemics and cold winter in the real estate market in 2022. In order to ease the pressure of debt maturity, some urban investment companies have to seek non-standard financing with interest rates of about 7% to 10%, and the cost of debt refinancing has risen significantly...
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Source: Tsinghua Financial Review, July 2023, Issue 116
Editor/Sun Shixuan
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