Beijing Lands in Another Debt Mess

Chinese authorities give provincial governments the green light to issue new land-revenue bonds

By Anjani Trivedi

The debt Beijing is ostensibly trying to rinse away through deleveraging is being reconstituted in a new form.

Take its handling of local-government debt—the largest portion of government debt overall.

Beijing this month gave provincial governments the green light to issue new land-revenue bonds. They can sell the bonds to fund infrastructure projects and use revenue from land sales, a major source of local-government income, to pay the interest.

This might seem a straightforward and legitimate way to finance local-government investment.

Alas, there’s a wrinkle: Rules issued last month bar local governments from pledging revenue from land sales for debt payments. They’re also barred from using land assets to guarantee debt issued in the past by off-balance-sheet financing vehicles linked to local governments.

The conflicting messages call into question Beijing’s commitment to lowering China’s worrying debt levels, and underline its dilemma. Infrastructure spending remains key to meeting official economic targets—investment still contributes over 40% of annual growth—and that requires an unfettered flow of financing. This flip-flop is just the latest in a series going back years, as the desire to tackle long-term financial-system risks is trumped by the need to keep near-term growth at a politically acceptable level.

Tying debt payments to the bubbling property market is a convenient stopgap. Local governments should have little trouble for now in servicing their land-revenue bonds. Of course, if property prices falter, local governments will need to find new ways of raising money—likely only perpetuating the cycle of debt creation.

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