China's cities are buried in debt, but they keep piling on new projects
In 2015, when Shangqiu, a municipality in central China, laid out a plan for the next two decades, it positioned itself as a transportation hub with a sprawling network of railways, highways and river shipping routes.
By the end of 2020, Shangqiu had built 114 miles of high-speed rail, and today several national railways make stops in the city. By 2025, Shangqiu expects the coverage of its highway network to have increased by 87%. The city is building its first two airports, three new highways and enough parking space for 20,000 additional slots.
The infrastructure splurge is far from over. On Feb. 23, the Shangqiu Communist Party secretary reiterated the city's vision as a logistics power when celebrating a new partnership with a state-owned investment firm, which could help Shangqiu borrow money for even more projects.
That morning, the city's bus operator announced that it would have to suspend services because of financial difficulties. The pandemic had hit it hard, the company said, and the Shangqiu government hadn't provided subsidies that it had promised. As a result, the company had not paid its employees for months — it couldn't even afford to charge its electric buses. A few hours after posting its announcement, the company deleted it, after it had made national headlines and the Shangqiu government had intervened.
China is full of Shangqius these days. As part of the ruling Communist Party's all-in push for economic growth this year, local governments already in debt from borrowing to pay for massive infrastructure are taking on additional debt. They're building more roads, railways and industrial parks even though the economic returns on that activity are increasingly meager. In their struggle to find the money to fund their new projects, and the interest payments on their old ones, cities are cutting public services and benefits.
Shangqiu is one of more than 20 towns and cities in China where bus services were shut down or put in peril because local governments had failed to provide the necessary operating funds. Wuhan and other cities cut health insurance. Still others slashed the pay of government workers. Many local governments in Hebei province, which borders Beijing, failed to pay heating subsidies for natural gas during the winter, leaving residents to shiver during a record-setting cold wave.
For nearly three decades, China's local governments were the envy of the world. They seemed to have unlimited resources to binge-build airports, roads and industrial parks, many of which were funded by selling land.
Now, many of them are in fiscal disarray. In the country's single-minded pursuit of its “zero-COVID” policy, local governments exhausted their coffers to comply with strict testing, quarantine and lockdown rules. Struggling businesses are paying less in taxes. After blow upon blow of government crackdowns, property developers are reluctant to buy land.
“Governments don't have money to spend on basic services if land sales do not recover dramatically,” said Victor Shih, an associate professor of political science at UC San Diego. “Local government, especially in third- and fourth-tier cities, will still find it difficult to meet many of its budgetary obligations.”
According to official data, China's 31 provincial governments owed around $5.1 trillion at the end of 2022, an increase of 66% from three years earlier. An International Monetary Fund report puts the number at $9.5 trillion, equivalent to half the country's economy.
But from the enthusiastic way that the cities have embraced investment — China's old playbook for economic growth — it's hard to tell that they're deeply in debt.
State media is full of breathless reports about new projects. Guangdong, China's biggest province by economic output, announced that it would invest $1.2 trillion in 1,530 projects in 2023. Henan, the province that includes Shangqiu, said it would spend $261 billion on 2,500 projects.
The problem is that these governments don't have the money.
In China, where the government owns virtually all the land, the main source of income for many localities has for years come from leasing or selling property to developers. But revenue from land sales fell by more than onefifth last year, according to the finance ministry. All 31 Chinese provincial governments ran deficits because of “zeroCOVID.” Two-thirds of the local government entities that borrow money exceeded unofficial debt thresholds set by Beijing, with their outstanding debt having surpassed 120% of their income by December, according to S&P Global.
In Shangqiu, the government didn't specify how it would fund its 701 projects for 2023. It did say that last year its revenue from land sales was half what the city had targeted, and that it had spent $1 billion on debt service. Put another way: Shangqiu used more than one-third of its tax revenue to pay interest on its debt. This year, officials are putting their hope in a big jump in land sales and some growth in tax revenue.
But Shangqiu is not planning to spend the money on public services. On the contrary, the city plans to cut spending on education, health care, employment protection, transportation and many other public services, according to budget documents on its website.
“We should protect and improve the public's livelihood based on our economic growth and financial health,” the documents said.
China is full of wasteful infrastructure that the government likes to brag about but that doesn't serve the most urgent needs of the public.
The Chinese government likes to say the country has the longest and fastest high-speed railways in the world. But except for a couple of lines that connect the megacities of Beijing, Shanghai, Guangzhou and Shenzhen, most lines operate below capacity and at a great loss. About 80% of China's highspeed railways constructed in the past decade were built in distant and poor regions, China State Railway Group said last year.
Zhao Jian, a professor at Beijing Jiaotong University, warned in an article that high-speed railways could become the “gray rhino” that crushed the Chinese economy because many local governments had taken on a lot of debt to build them. But most of those railways move people, not freight. So they would make sense only in densely populated areas where people were willing to pay more for speed.
Local leaders are interested in infrastructure projects because their economic payoff, while minimal, is immediate — people get construction jobs, and companies get building contracts. Such a short-term approach dominates in China's political system, in which cadres are deployed to run toward the goal set by their leader regardless of the financial or human cost.