China orders indebted local governments to halt certain infra projects

In a bid to manage the substantial municipal debt of $13 trillion and mitigate potential risks, China has directed heavily indebted local governments to postpone or suspend certain state-funded infrastructure projects, three insiders familiar with the matter told news agency Reuters.

The State Council, grappling with debt concerns while attempting to stimulate economic growth, issued a directive instructing local governments and state banks to delay or halt construction on projects in 12 regions across the country, where less than half of the planned investment has been completed.

The directive, not previously disclosed, signifies Beijing's intensified efforts to control municipal debt, especially in light of its recent measures to tighten restrictions on debt and stimulate economic growth that historically relied on infrastructure investments by local governments. Infrastructure projects affected by this directive include expressways, airport reconstruction and expansion, and urban rail initiatives. However, projects approved by the central government or those related to affordable housing are reportedly exempt.

The move comes amid Beijing's ongoing efforts to defuse risks in the world's second-largest economy and ensure financial stability. China has been grappling with a property market downturn, triggering a cash crunch and concerns about potential defaults, particularly in heavily indebted local governments. As of 2022, local government debt in China reached 76% of gross domestic product, up from 62% in 2019, surpassing central government debt at 21%.

The State Council's directive builds on previous measures in October that restricted local governments' ability to take on debt and limited the scope of state-funded projects they could initiate. Additionally, the new directive provides a more detailed list of infrastructure projects for local governments to avoid, with an emphasis on reducing the scale of investments for projects with an investment completion rate above 50%.

China's top leaders have expressed the need to address risks stemming from property, local debt, and small and midsize financial firms, reflecting concerns about potential defaults and slower growth prospects. The targeted regions for debt reduction measures include Liaoning and Jilin provinces, Guizhou and Yunnan in the southwest, and the cities of Tianjin and Chongqing.

While the directive encourages regions to minimize debt risks to a "low and medium level," the specifics of how debt reduction will be measured remain unspecified. Once local governments achieve their debt-cutting targets, the National Development and Reform Commission (NDRC), China's top economic planner, is expected to seek cabinet approval to adjust debt policies for new infrastructure investments. The NDRC has not provided a comment on the matter.

(With Reuters inputs)