One of the key problems in China’s current economic situation has for years now been local government debt. The exact numbers are difficult to calculate, but the overall impression is that the scale is large, and even for a system which has complete control over everything, this is a problem. A new wrinkle in the game is CTICs—Culture and Tourism Investment Companies. They are growing in number, they are backed by local governments and they are creating a growing pile of new debt.
For decades, at least, and one could argue centuries, a key dynamic of Chinese governance has been the relationship between central government and local government financing with the local governments trying to get as much money as possible out of the Centre, and providing as little tax revenue back. In the past couple of decades a herd of Local Government Financing Vehicles (LGFVs) grew up across China, which have been used by officials to park debt off their government books, with predictable consequences—it all became messy. The LGFV problem, it seems, has to some extent been brought under control in the past couple of years with the Centre insisting on a cleanup and reduction in debt levels. But in line with the basis of the Chinese saying “upstairs sets up a policy, and downstairs sets up a work-around,” local governments have been setting up CTICs based on the post-COVID domestic tourism trend. The excellent news service Caixin points out that this is not going so well, and that the CTICs have been used by local governments “to sidestep strict borrowing limits.”
The danger is that the CTICs repeat the mistakes of the LGFVs, with funds often being diverted to local government use, undermining the companies’ supposed purpose and exposing them to the same debt pressures as LGFVs. Not all of them are loss-making but the number that are losing money is growing. Many tourism development projects can be very expensive—remaking ancient towns, building amusement parks etc.—and there is no certainty on how many people come visit.
This all speaks to the fact that in the end there are only two ways to deal with debt—it can be paid down, or it can be written off. But it can’t be resolved by creating more debt. And so the debt problem rolls on.
Have a great winter weekend.