Local government debt is now so unwieldy in China that some desperate district governments have turned to the private sector for help to pay their employees.
The Chinese language magazine of state-run Xinhua news agency reported on Friday that the city of Ordos, in northern China’s Inner Mongolia, had accumulated almost six and a half times its annual revenue in debt—or 240 billion yuan ($39 billion). Some of the city’s districts had borrowed from businesses to meet salary obligations.
The city has already developed an infamous reputation as the biggest ghost town in China. When large deposits of coal were discovered about 20 years ago, developers moved in and built a shining new city capable of housing hundreds of thousands of people, complete with skyscrapers and a vast square called Genghis Khan Plaza. But the people didn’t follow and Ordos began to accumulate debt. Two decades on, the mines are struggling, as demand for coal has slumped amid China’s economic struggles.
Although the fate of Ordos was tied to the discovery of coal, poorly planned building projects with lackluster returns and highly indebted local governments are common in China. As we reported in June, big cities have large liabilities, too, largely due to unregulated “shadow lending.” These financing platforms often use their relationship with local governments to skirt regulation and take on fake assets. More worrying still, local government debt is exposing China’s entire banking system to risk.
China’s liquidity crunch may be worsening the debt problems of cities like Ordos. Interbank lending rates spiked last month, starving the financial system of credit, and the central bank initially refused to intervene. This may have been a crude measure to strangle small, highly indebted banks, or it may have just been bad management. Now Beijing has to contend with the threat of default in cities like Ordos, which could take the country’s debt crisis to a whole new level.