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China is Running into a Debt Crises, and its Cities May be First to Fall

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By Augustine Mbam - - 5 Mins Read

China's economy's growth declines as its provinces have recorded a huge increase in their debt profile. Whenever the officials of China meet for their annual parliament in Beijing next week, the central issue to be discussed is the increasing economic decline the country is facing. The majority of the provinces in the country are currently under a huge debt that may escalate into an economic crisis if not adequately tackled by the government. 

According to many reports, at least 17 of the 31 regional governments in China face huge financial damage. From the calculations done by Bloomberg, some of the outstanding borrowings from the provincial governments in China exceed 120% of their income in 2022. The data that Bloomberg collected was from the official statistics presented by the government, which is a huge debt profile for a regional government. 

Tianjin, a provincial-level city, has the biggest debt profile among other provinces in the country. Tianjin is more known for its port and massive overdevelopment, but it currently needs to improve because of its accumulated debt. From the official calculations, Tianjin's debt is about three times larger than its income for the year. This is a bad sign for the city, and it is driving investors away from the city. Living costs in Tianjin have also increased due to the huge debt. 

The high China debt profile will stall development in many cities. While the regional government might have little financial power to spend, it shifts responsibility to the central government. The People’s Bank of China is also in the picture as it could make them reduce the interest rates so that the regional governments currently in debt can find a means of paying back. 

According to Lisheng Wang, an economist at Goldman Sachs Group Inc, "Rising debt levels imply higher debt repayment and servicing costs for local governments and limit their room for fiscal stimulus amid falling return on capital."

Chinese Cities Already Seeing the Effects of High Debt 

Many Chinese cities already feel the effects of China's debt profile. Many cities are already witnessing much public infrastructure remain uncompleted for an extended period. The China 117 Tower, the world’s sixth-tallest skyscraper, is already being affected by the increasing debt profile of regional governments. The Tower has been left uncompleted for a long time now. 

According to a report by The Economist, the China 117 Tower has remained uncompleted for a long time. And this is mainly because the government currently doesn't have enough funds to pay for the project. 

China's 117 tower
China 117 tower (Source: Daily Mail)

With cities being affected, many financial analysts are already predicting that the central government of China will instill tighter control of how regional governments spend. "Central government scrutiny will likely gradually tighten when a local government is approaching the debt threshold. Financial support from local governments toward associated state-owned enterprises will become increasingly selective," Susan Chu, a senior director of S&P Global Ratings, said.