China's cabinet has restricted the ability of local governments in 12 heavily indebted regions to take on new debt and placed limits on what new state-funded projects they can launch, three sources with knowledge of the matter said.
The 12 regions, which cover a wide swathe of the nation, will only be allowed to take on specified projects, such as those approved by the central government, the sources said. Other projects, such new railway stations and power plants, will not be permitted.
The order also specifies that debt growth of local government financing vehicles should not be higher than average loan growth rates of the corporate sector in the province where the LGFVs are located, two of the sources said. In practice, that means increasing debt at the national level while attempting to lower debt at the local level. On Tuesday, China approved an additionalAccording to the new order from the State Council, local governments will only be permitted to take on debt to fund major projects approved by the state council as well as a few types of projects in key areas. Those projects include the redevelopment of urban neighbourhoods and building affordable housing, two of the sources said.
The crash in property prices and a cash crunch have left developers in no shape to buy more land, traditionally a key source of local government revenue. Land sales in January-September were down almost 20 percent from the year-ago period.While central government debt is only 21% OF GDP, local debt reached 92 trillion yuan , or 76% of the country's economic output in 2022, up from 62.2% in 2019.
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