Will Rising Debt in China Lead to a Hard Landing?

Abstract

Moody has recently downgraded China's sovereign debt, which's Moody's first downgrade for the country since 1989. The objective of this study is to get an insight into the local and regional government debt in China, analyze the key factors, and evaluate the economic risks. Based on the published data since 1996, the granger causality test is performed to find out the relationship between local government debt level, the fiscal income, GDP growth rate and CPI. Some major findings are: i) local government debt is accumulated through more spending on economic development and less funding obtained from the revenue sharing scheme between governments. ii) fiscal income and GDP growth rate have positive impact on the increase of local government debt. iii) CPI increase shows negative impact on the local government debt. It's projected that in the coming years, slower growth and less income with a stable CPI could slow down debt accumulation. The Chinese government should monitor the risk factors closely and use risk mitigation tools to avoid a hard landing.

Impact of Local Official Corruption on Local Government Debt in China: The Mediating Role of Government Investment Efficiency

“…At the end of 2020, the debt ratio of local governments in China reached 93.6% (Ministry of Finance of the People’s Republic of China 2021), close to the 100% debt risk warning line (National People’s Congress of the People’s Republic of China, 2015). This expansion of local government debt has also slowed China’s economic development (Cang & Matt, 2017). Since 2014, Chinese government authorities have launched a variety of policies and regulations to prevent and defuse financial risks.…”