Parallels
10:37 am
Tue January 28, 2014

In China's Hugely Indebted Cities, Some Big Bills Are Coming Due

Originally published on Tue January 28, 2014 6:55 pm

In recent years, rampant borrowing has driven a significant chunk of China's economic growth. The bill is now becoming clearer — and it's big. Late last year, China revealed that local governments owe nearly $3 trillion – more than the gross domestic product of France, the world's fifth-largest economy.

One city with a sizable debt problem is Wuhan, an industrial hub that lies along the Yangtze River in central China's Hubei province. With a population of 10 million, Wuhan has a growth rate of 11 percent and is known for its car factories and many universities.

According to China's state media, it also owes more than $33 billion, nearly twice Wuhan's GDP. Banks became so concerned that they cut off funding for a 17-mile highway. A local current affairs TV show covered the debacle.

"The River North Highway has been under construction for many years and still isn't finished," read one of the show's hosts, quoting a citizen complaint via the Internet. "It's the pits. How tragic!"

On the show, Zhao Zhenyu, a university professor, bashed the government for launching a project it couldn't afford.

"Even though you knew the project was not ready to proceed, you still insisted on holding a ribbon-cutting ceremony," Zhao scolded. "I don't know if this was lower-level officials deceiving their bosses or bosses just making arbitrary decisions."

Wuhan Tries Novel Ways To Offset Costs

Work on the project, which lay dormant for two years, has begun again, but a supervisor told NPR that there is still no financing and that the company building the highway hasn't been paid in a year and is still owed about $16 million.

Wuhan government officials did not return emails or phone calls seeking comment on the city's debt problem. They have, though, tried novel ways to offset the massive cost of infrastructure, including the city's first subway lines.

"Wuhan subway's advertising rights were auctioned off and the government recovered about $300 million," says Wu Xinmu, an economics professor at Wuhan University.

Officials even sold the naming rights to a subway station to a company that sells frozen duck parts, but dropped the idea after people complained. Wu says such schemes don't bring in enough money and the city has to control its borrowing.

"The government can't just rack up an unlimited amount of debt, even if the projects are for the public good," says Wu.

A Stacked System Means Default Unlikely

When Americans hear these kinds of debt figures, they might think of analogies close to home, such as last year's bankruptcy in Detroit, which couldn't pay an estimated $18 billion in obligations.

In fact, Wuhan's debt is much larger than Detroit's, but economists say the odds of Wuhan – or any other Chinese city — going bankrupt is close to zero.

"The problem is not that there is going to be a local government default on the banks," says Andy Rothman, who lives in Shanghai and works as the China strategist for CLSA, a brokerage firm. "That's not going to happen."

He says cities won't go under because the Communist Party controls the financial system.

"It's nothing like the way we think about the United States, because this is in many ways a fake financial system," Rothman adds.

In the case of Detroit, the local government was at odds with private creditors, unions and pension boards. In Chinese cities, the Communist Party is on both sides of the loans.

"What we have in China is a Communist Party-controlled bank lending money to a Communist Party-controlled local government to build Communist Party-approved public infrastructure," says Rothman.

A Slowdown Needed

He and many other economists in China say Beijing can handle local governments' huge debts, because it still has a ton of money and China's annual GDP is over $9 trillion.

But, Rothman adds, things have to change. Spending on public infrastructure continues to grow at 20 percent a year.

"That's just unsustainably fast," he says.

It's unsustainable, because if it continues it could eventually threaten China's financial system.

As a result, economists say that rapid increase in infrastructure spending must ease. That will mean fewer new highways and subway lines, which many cities in China's interior still need and, ultimately, will spell slower growth for the country's once-blistering economy.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

AUDIE CORNISH, HOST:

And I'm Audie Cornish.

You've heard about China's explosive economic growth. Well, some of it has been driven by rampant borrowing on the part of its municipalities. And the bill for all that borrowing is becoming clearer and it's big. China says its local governments owe nearly $3 trillion - that's more than the gross domestic product of France.

NPR's Frank Langfitt visited one of China's more debt-ridden cities for a closer look.

FRANK LANGFITT, BYLINE: Wuhan is an industrial hub along the Yangtze River in Central China, with a population larger than New York's and an impressive growth rate of more than 11 percent. To finance some of that growth, though, Wuhan has racked up big debts. According to China's state-run media, the city owes more than $33 billion - nearly twice Wuhan's GDP. Banks became so concerned they cut off funding for a 17-mile highway project.

The debacle became a source of public debate. Here, on a Wuhan TV show, a host reads people's complaints.

(SOUNDBITE OF A NEWSCAST)

UNIDENTIFIED WOMAN #1: (Through translator) The River North Highway has been under construction for many years and still isn't finished. It's the pits. How tragic.

LANGFITT: On the show, Zhao Zhenyu, a university professor bashed the government for launching a project it couldn't afford.

PROFESSOR ZHAO ZHENYU: (Through translator) Even though you knew the project was not ready to proceed, you still insisted on holding a ribbon-cutting ceremony. I don't know if this was lower-level officials deceiving their bosses or bosses just making arbitrary decisions.

UNIDENTIFIED MAN: (Foreign language spoken)

LANGFITT: The project did re-start again. In fact I'm looking at it right now. There are a bunch of tall supports for a bridge and a bunch of workers here. But I talked to some one involved in the project and he said there still is no financing, and that the company that's working on it has not been paid in a year and is still owed about $16 million.

Wuhan's government has tried novel ways to offset the massive cost of infrastructure, including the city's first subway lines.

Wu Xinmu is an economics professor at Wuhan University.

WU XINMU: (Through translator) Wuhan subway's adverting rights were auctioned off and the government recovered about $300 million.

LANGFITT: Officials even sold the naming rights to a subway station to a duck parts company, but dropped the idea after people complained. Wu says such schemes don't bring in enough money and the city has to control its borrowing.

XINMU: (Through translator) The government can't just rack up unlimited amount of debt, even if the projects are for the public good.

LANGFITT: When Americans hear these kinds of debt figures, they might think of analogies close to home.

(SOUNDBITE OF A NEWSCAST)

UNIDENTIFIED WOMAN #2: It's a sad day for the Motor City. Detroit has now filed the largest municipal bankruptcy in American history, saying they simply can not pay their bills.

LANGFITT: In fact, Wuhan's debt is more than 50 percent larger than Detroit's. But economists say the chances of Wuhan or any other city here going bankrupt is close to zero.

ANDY ROTHMAN: The problem is not that there is going to be a local government default on the banks. That's not going to happen.

LANGFITT: Andy Rothman is the China strategist for CLSA, a brokerage firm. He says cities won't go under because the Communist Party controls the financial system.

ROTHMAN: It's nothing like the way we think about the United States, because this is in many ways a fake financial system.

LANGFITT: In the case of Detroit, the local government was at odds with private creditors, unions and pension boards. In Chinese cities, the Communist Party is on both sides of the loans.

ROTHMAN: What we have in China is a Communist Party-controlled bank lending money to a Communist Party-controlled local government to build Communist Party-approved public infrastructure.

LANGFITT: Rothman says the party can handle local governments' huge debts because it still has a ton of money and China's annual GDP is over $9 trillion. But Rothman adds things have to change.

ROTHMAN: Spending on public infrastructure in China was growing at about 20 percent a year. It spiked up to about 60 percent in 2009. And now it's growing at 20 percent a year again. That's just unsustainably fast.

LANGFITT: Unsustainable, because it could eventually threaten China's financial system. Economists say the increase in infrastructure spending must ease. That will mean fewer new highways and subway lines, which many cities in China's interior still need. And ultimately, all this will spell slower growth for China's once-blistering economy.

Frank Langfitt, NPR News, Shanghai Transcript provided by NPR, Copyright NPR.