One of China’s biggest cities Shanghai is on a trial mission to wipe off all hidden debt of the government. It will be the second region of the country to begin such a program. It will help them clear the off-balance sheet perils.
The government of the Shanghai city didn’t spill much on details but it is the response to the strategy created by central government for preventing and financial risks attached to hidden debt by local governments and resolving them purposely. A statement was released on Tuesday.
The announcement has arrived two weeks after a similar trial took place in Guangdong province. It is also known as the manufacturing hub in the Southern China region. It suggested that local governments were getting serious about eliminating off-balance sheet debts.
The biggest source for hidden debt is the financial vehicles of local governments that are also known as LGFVs. These are used for raising funds in making infrastructure better. Moreover, they provide a guarantee of repayment, implicitly.
As per the estimation of Goldman Sachs Group, LGFV debt increased to USD 8.3 trillion (53 trillion yuan) at the last year’s end. It was sixteen trillion yuan in 2013.
That is equivalent to approx 52 per cent of China’s GDP. Moreover, it is bigger than the official outstanding debt of the government.
Interestingly, Beijing has been trying to tackle its hidden debt but has not got success even after several years. However, it paid immense importance to the process after finding a national security risk associated with it. It has asked officials to pay down all debts or at least bring them down on local authorities’ balance sheets.
Provinces and cities have initiated to pay the hidden debts this year by selling refinancing bonds.