China’s economy seems to be stuck in a vortex right now.
This vortex continues to erode China’s economy. It is becoming difficult for China to get out of this vortex. India saw tremendous demand after the Covid lockdown. Due to which there was a quick recovery in the economy. Due to this recovery, we are today the fastest growing economy among the major countries. But this has not happened in China. Demand is not being seen in Chinese markets. Commodity prices are falling. This raises questions about the recovery in China’s economy after Covid. Even after being in lockdown for a long time, Chinese people are not spending money in the market. This country has gone into deflation in the month of July.
Local governments’ debt became a problem
There are many challenges facing China’s economy at this time. These include local government debt, record low birth rates, a sluggish real estate market and high youth unemployment. We all know how debt, when it becomes excessive, can swallow an economy. Pakistan is an example. China’s local government has taken huge loans. This debt is becoming a big problem now.
LGFV’s debt almost doubled
The debt of China’s local government financing vehicles (LGFVs) has almost doubled since 2017. According to a recent IMF report on China’s economy, the debt reached about $7.8 trillion in 2022. The massive increase in debt is raising concerns about the financial stability of China’s local governments. According to a 2014 IMF working paper, LGFVs are companies created by local governments. These companies are formed to borrow from banks, trust companies or the bond market. These vehicles form a series of corporate debts to raise funds for infrastructure or state welfare projects. They have low returns and take a long time to complete.
Bonds have to be sold to repay the loan
China’s local governments are finding it difficult to repay these loans. China is now discussing allowing local governments to sell 1.5 trillion yuan ($295.9 billion) in special financing bonds to help 12 regions pay off their debt. Many regions, including Tianjin, Guizhou, Yunnan, Shaanxi and Chongqing, have come under pressure to pay off local government debt. Kexin gave this information in a report on Saturday. China’s central bank may set up a special purpose vehicle with banks to provide long-term, low-cost liquidity to local government finance units, according to the report. According to the report, this can help local government financial vehicles reduce their liquidity risk. In China, the debt of local governments has become the biggest threat to the Chinese economy.
