Debt-ridden Chinese cities face brutal cutbacks

The debt trap is ensnaring many of China's cities.  While Americans properly worry about the ballooning federal debt, China is already beginning to experience a crisis due to debts incurred by local governments.  Bloomberg has a long article focusing on the city of Hegang, in the northeast province of Heilongjiang.  Hegang, with a population of nearly a million, is in decline along with its coal industry and experiencing brutal spending cuts in order to keep up with its interest payments.

Hegang's residents are now feeling the brunt of the fiscal clampdown. During a recent visit to the city, locals complained about a lack of indoor heating in freezing winter temperatures, and taxi drivers said they were being slapped with more traffic fines. Public school teachers worried about rumored job cuts, and street cleaners endured two-month delays to their salaries.

Outside the city's largest hospital, a middle-aged orderly wearing green scrubs and a mask said her employers unilaterally changed her work contract from a government-run medical facility to a third-party vendor, reducing benefits like paid overtime for working on holidays. Her monthly wage of 1,600 yuan ($228) had been delayed by more than 10 days every month since late last year.

"I'm upset about the situation," said the woman, who asked not to be identified in order to talk freely about her work conditions, as she pushed a wheelchair loaded with flattened cardboard boxes to an outdoor recycling point. "Everything is so expensive. I can barely get three square meals a day." 

Hegang (photo credit: STW932CC BY-SA 4.0 license).

Hegang is experiencing problems that likely will spread elsewhere in China:

Goldman Sachs Group Inc. estimates China's total government debt is about $23 trillion, a figure that includes the hidden borrowing of thousands of financing companies set up by provinces and cities.
While the chance of a municipal default in China is relatively low given Beijing's implicit guarantee on the debt, the bigger worry is that local governments will have to make painful spending cuts or divert money away from growth-boosting projects to continue repaying their debt. (snip)

"Many cities will become like Hegang in a few years' time," said Houze Song, an economist at US think tank MacroPolo, noting that China's aging and shrinking population means many cities don't have the workforce to sustain faster economic growth and tax revenue. 

"The central government may be able to keep things stable in the short term by asking banks to roll over local governments' debt," Song said. Without loan extensions, he added, "the reality is that over two thirds of the localities won't be able to repay their debt on time." 

This doesn't even include consideration of the massive debts of property developers, which have already led to the bankruptcy of one major firm.

Lest we gloat over China's local debt problems, our federal debt has already reached unsustainable levels.  The cutbacks being experienced by Hegang's population may give us a preview of the pain that may be ahead when the money runs out here.  But I wonder if the federal government would ever inflict difficult cutbacks instead of defaulting.  Of course, a federal default would end up imposing even far greater pain on not just government employees, contractors, and government service recipients.  Uncontrollable hyperinflation and chaos would follow.

Allowing governments to borrow rather than pay as they go is inherently dangerous, as future taxpayers, many of them as yet unborn, have no political representation.  As with individuals, financing current expenditures with debt is a terrible idea.  Debt ought to be limited to major capital expenditures with a predicted lifespan well beyond the terms of the debt.

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