China’s cities are struggling to pay their bills from three years of Covid and a

Hong Kong
CNN
 — 

Three years of strict pandemic controls in China and a real estate crash have drained local government coffers, leaving authorities across the country struggling with mountains of debt. The problem has gotten so extreme that some cities are now unable to provide basic services, and the risk of default is rising.

Analysts estimate China’s outstanding government debts surpassed 123 trillion yuan ($18 trillion) last year, of which nearly $10 trillion is so-called “hidden debt” owed by risky local government financing platforms that are backed by cities or provinces.

As the financial pressure has mounted, regional governments have reportedly been slashing wages, cutting transportation services and reducing fuel subsidies in the middle of a harsh winter.

Thousands of people in the northern province of Hebei had trouble heating their homes in November and December because of a shortage of natural gas, according to multiple Chinese media reports. Cuts in government subsidies were partly to blame, according to state-owned news site Jiemian.

In January, in the northernmost province of Heilongjiang, households in the city of Hegang were also left without heat after local firms severely restricted supply. The companies blamed the move on a lack of government subsidies.

The lack of heating in the dead of winter has led to widespread complaints on social media. The central government in Beijing responded by ordering cities to provide adequate heating, but without specifying who will pay the bills.

Local governments have exhausted their budgets after spending enormous amounts of money on enforcing frequent Covid lockdowns, mass testing and setting up quarantine centers before December’s policy U-turn, which signaled the abrupt end of Xi Jinping’s zero-Covid policy.

“Beijing is facing an economic minefield of its own making,” said Craig Singleton, senior fellow for the Foundation for Defense of Democracies in Washington. “All told, China’s current debt crisis represents a perfect storm.”

It’s not yet clear how much the country has spent in total on fighting the pandemic. But one province, Guangdong, revealed that it had spent $22 billion on eliminating Covid over the three years beginning 2020.

Revenue, meanwhile, contracted sharply over the same period. Rolling lockdowns seriously dented household incomes, leading many to reduce spending, which in turn resulted in less tax revenue for local governments. Huge tax breaks to support businesses through the pandemic also reduced government income.

Further complicating matters is the housing market slump; home prices have been falling for 16 straight months. Land sales, which typically account for more than 40% of local government revenue, have collapsed.

Last year, a number of cities suspended bus services due to budget constraints, including Leiyang in Hunan province and Yangjiang in Guangdong, according to operators’ announcements.

Separately, Hegang, the city in Heilongjiang province, made history in early 2022 by becoming the first to be forced to undergo a fiscal restructuring due to grave debt distress, according to state media reports. As a result, it must cut spending on infrastructure projects, reduce government subsidies to industries, stop hiring new staff and sell assets, according to rules published by the State Council.

Public sector jobs, considered the most secure in the country, were also affected elsewhere. In June, several wealthy eastern provinces — including Guangdong, Zhejiang and Jiangsu -— slashed pay by as much as 30%, according to Chinese news website Caixin.

“China’s runaway local debt poses a serious threat to the country’s overall economic health and will weigh heavily on China’s still-nascent recovery,” said Singleton.

The debt inhibits the government’s ability to spur growth and stabilize employment, as well as maintain or expand public services, he said.

“No doubt, China’s current debt crisis has the potential to exacerbate existing socio-economic tensions,” Singleton said, adding that renewed public protests like those in late 2022 could emerge, as Chinese citizens come to terms with “vanishing jobs, closed businesses and reduced wages.”

China’s local government debt had already been rising dramatically for a decade before the pandemic, largely the result of a state-led investment boom in the wake of the 2008…