Final Country Report: Written Report

Ticking Time Bomb: How Lack of Data Transparency Created a Debt Crisis in China

Introduction:

Throughout history, access to a wide range of information has always been a privilege enjoyed by a selected few. Yet, this changed dramatically since the dawn of the 21st century. Powered by the World Wide Web and telecommunications technologies, information once inaccessible or difficult to access due to physical limitations can now easily be shared and accessed by anyone, anywhere, anytime. However, within the near-infinite amount of information available on the internet, it is surprising to note that government data is rarely available. Although progress toward digitization has been made by wealthy western nations, the overall level of publicly accessible government data is scarce. The absence of government data could be extremely problematic and could have dire consequences. This country report will shed light on how the lack of data transparency has contributed to China’s municipal debt crisis. The report will provide the history of China’s debt crisis and introduce how local government financing vehicles, a financial instrument that permits local officials to issue debt without oversight, have, in essence, created an impending debt crisis for China. The report will conclude with what other governments could do to prevent such a catastrophe from reoccurring. 

China’s Gilded Economic Growth:

China’s economic growth has been regarded as a miracle by many around the world(Korry, 2006). With an annual growth rate of 10%, China’s GDP per capita rose from $156 in 1978 to $10,500 in 2020(Chen, 2022; World Bank, 2020). It is now the second-largest economy and is expected to overtake the United States by 2030(Rapp & O’Keefe, 2022). Such economic growth has provided China with immense influence, leading many around the globe to favor China’s economic development model over American economic liberalism which has long been held as orthodox(Kurlantzick, 2013). As President Xi Jinping declared at the Chinese Communist Party’s 100th anniversary, the rise of China seems to be “unstoppable”(Xi, 2021). Yet, the reality of China’s economic well-being might be less glamorous than many expected. Underneath China’s gilded economy is a potential debt crisis that could lead to a financial catastrophe. 

History of China’s Municipal Debt Crisis:

The debt crisis originated in the 1990s when the central government enacted a series of budget laws preventing municipal governments from building up massive debts. Such austerity measures are problematic for government officials since they would have to cut back on infrastructure projects and social programs. In response, they begin bypassing these budget regulations by relying on local government financing vehicles( LGFVs) to fund their expenditures(The Economist, 2021). As defined by Dr. Donald Clarke from George Washington University, LGFVs are “companies capitalized and owned by local government and established for the purpose of raising funds for municipal infrastructure construction”(Clarke, 2016). What makes LGFVs unique is that although it is issued by municipal governments, it does not appear on public balance sheets. This enables officials to borrow freely without any oversight. The lack of supervision led these LGFVs to build up to a staggering amount: according to one estimation, a total of 53 Trillion yuan or $7 trillion (Lee, 2021). To put it in perspective, the debt that is financed through LGFVs is equivalent to 52% of China’s gross domestic product in 2020(World Bank, n.d). Aside from the sheer size, the central government lacks any official account for these debts making it even more problematic. The State Council of the People’s Republic of China has issued numerous decrees aiming to curb the increase in LGFVs since 2010, but the lack of transparency made it difficult for the central government to take direct action (State Council of the People’s Republic of China, 2010). This means that a huge wave of default can happen at any second and the central government lack the ability to prepare for any potential financial fallout. In other words, the lack of data transparency meant that LGFVs became an unpredictable timebomb that could detonate the entire economy.

Current Development of China’s Debt Crisis:

Making matters worse, LGFVs would likely further balloon in the following years. COVID-19 has led to a decrease in tax revenues while spending has skyrocketed due to pandemic-related expenditures(Hsu, 2021). Municipal governments have previously relied on revenue from land sales to make up for the difference. Yet, recent turmoil in the real estate market, posed by the Evergrande crisis, had led these sales to plummet(Chen, 2022). As a result, this leaves municipal governments no choice but to turn to LGFVs and take up even more debt to make up for the funding gap in the coming years. Evidence of a possible debt crisis has already appeared. Hegang, a highly indebted boomtown in the Heilongjiang Province of northeastern China, became the first prefecture-level city to undergo fiscal reorganization in December 2021(Chingman and Qiao, 2021). Although Hegang’s debt crisis is a mere blimp to China’s overall economy, it is nonetheless significant since Hegang represents just the tip of the iceberg of a potential debt crisis that could derail China’s economy. Due to the increasing concern regarding LGFV, an article published in 2021 by Xinhua, China’s premier state-owned new media, have issued guidance allowing state governments to default instead of continuing to build up more debt (Xinhua, 2021). 

Lack of Data Transparency Caused China’s Debt Crisis:

China’s municipal debt crisis is largely attributed to the lack of data transparency. According to Open Data Barometer, China’s detailed government budget dataset and detailed government spending dataset scored 15 out of 100 and 5 out of 100 respectively(Open Data Barometer, n.d). The astonishing lack of transparency allowed government officials to use LGFVs to finance unsustainable infrastructure projects that artificially boost the GDP growth to meet their political goals. Subsequent government officials, left to fill the gaps of unsustainable infrastructure projects initiated by their predecessors, will need to take on even more debt using LGFVs to finance previous debt. This, as a result, turns the situation into a game of “passing the parcel” where government officials take on ever more debt and pass on the problem until the debt is beyond serviceable leading to an all-out debt crisis. 

Implications for Other Countries:

China’s municipal debt crisis has shown the consequences of lacking government data transparency. Although some more progressive Chinese cities, such as Shanghai, have taken steps to make data more transparent through partnering with nonprofits such as Open Data China, having more data transparency has yet to be a goal pursued elsewhere in China (Chawana, 2021). In addition, considering the Chinese Communist Party’s secretive nature, even if having open data could have prevented another crisis from occurring, it is unlikely the government is going to cede its power and start any initiatives that will push for more government data transparency. 

To prevent a similar crisis from occurring, countries around the globe should strive to make government information more widely available to the public. Having open data will empower civil society and the public to oversight government operations leading to more accountability. According to Open Data Barometer, some possible policies that could facilitate such data transparency include open government data by default, building data infrastructure that allows information to be digitized, and making data more user-centric(Open Data Barometer, n.d). 

References:

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Chen, Y. (2022, January 11). Breakingviews – China’s next debt crisis will be municipal. Reuters. Retrieved April 2, 2022, from https://www.reuters.com/breakingviews/markets/asia/chinas-next-debt-crisis-will-be-municipal-2022-01-10/

Chen, Y. (2022, January 17). 中国经济：2021年GDP增幅8.1%，四季度增幅走低引发关注. Retrieved January 30, 2022, from https://www.bbc.com/zhongwen/simp/business-60020390

Chingman, And Qiao. L. (2021, December 29). Former Chinese coal-mining city of Hegang in dire financial straits. Radio Free Asia. Retrieved April 2, 2022, from https://www.rfa.org/english/news/china/hegang-finances-12292021122046.html

Clarke, D., & Lu, F. (2017). The law of China’s local government debt: Local government financing vehicles and their bonds. The American Journal of Comparative Law, 65(4), 751–798. https://doi.org/10.1093/ajcl/avx036

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Hsu, S. (2021, March 20). Covid-19 made China’s debt problem worse. The Diplomat. Retrieved April 2, 2022, from https://thediplomat.com/2021/03/covid-19-made-chinas-debt-problem-worse/

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Lee, A. (2021, November 2). Is China’s local government debt a concern and what role do lgfvs play? South China Morning Post. Retrieved April 2, 2022, from https://www.scmp.com/economy/china-economy/article/3154549/chinas-local-government-debt-concern-and-what-role-do-lgfvs

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