Meanwhile, in the country’s embattled property market, sales are slowing after an initial rebound, and debt-laden local governments are pulling back on infrastructure spending.Fears that China’s economic recovery is faltering are also reflected in declining commodity prices. The price of iron ore, a crucial ingredient for steelmaking, has fallen 23 per cent from its March high.
But slower growth means it’s difficult for revenue to keep pace with the growth in total Chinese debt – including governments, companies and households – which has now ballooned to more than 300 per cent of GDP.Investors are particularly worried about the ability of LGFVs to continue servicing their debts, particularly since many of the infrastructure and property projects they backed are uneconomic and are delivering investment returns well below the cost of debt.
But Beijing’s crackdown on local and regional government finances comes at a time when many are experiencing severe financial strains from slowing activity. Last year, local tax revenues fell almost 10 per cent and revenues from land sales plunged by more than 25 per cent.That leaves local and provincial governments with the problem of whether to use part of their dwindling revenues to repay the borrowings of their LGFVs.
China’s economic rebound was already on shaky ground. The growing strains on local and provincial governments as they grapple with the massive $15.3 trillion of borrowings accumulated by their financing arms threatens to further derail the recovery of the world’s second-largest economy.