mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Jiangsu: The Detroit of China


Among China’s heavily indebted provincial and local governments, Jiangsu stands out. Two of its main industries, shipbuilding and solar panels, are “drowning in overcapacity,” Reuters reports. Several districts and cities have resorted to unorthodox ways of bringing in revenue fast, like refusing to pay civil servants, refusing to compensate landowners for land sold to developers, and even setting personal fundraising targets for residents as a precondition for allowing them to continue their jobs. The future for Jiangsu does not look good.

Jiangsu dove headfirst into shadow banking, or the high-risk practice of offering lenders much higher returns than normal banks’ borrowing rates. Now the province finds itself unable to pay back its loans:

Governments in the province accounted for 30 percent of all investment trusts sold in China in 2012, Shenzhen-based data provider Use-Trust said.

Wuxi alone raised 9.2 billion yuan this way, offering investors in its trusts returns of close to 10 percent, well above bank borrowing rates of around 6 percent. The funds were partly used to pay for the demolition of villages to make way for property developments and to build industrial parks.

Governments in Jiangsu sold 343 billion yuan in bonds last year through financing companies, Wind Information Co Ltd, a Chinese data provider, said. That was three times greater than Guangdong, China’s wealthiest province.

Perhaps not surprisingly, Jiangsu has accounted for the lion’s share of the rise in China’s bad debts. A central bank official was quoted in Chinese media last month saying Jiangsu made up 40 percent of the increase in the first five months of 2013.

Jiangsu might be the best example of this, but it is hardly the only one. Across China, regional and local governments are badly in debt. The IMF and other international organizations have repeatedly warned that China’s municipal debt is one of the greatest threats to the economy. China’s leaders recognize this and are trying to ease the economy onto a more stable path for the long term.

On Tuesday, for example, Beijing announced a five-year moratorium on the construction of “official buildings” and “glitzy structures” like training centers and government motels. The government said the move was in line with its frugality campaign, but it was also a sign that Beijing wants to clamp down on constructing buildings solely for the sake of boosting GDP growth or glorifying the Communist Party. This will help, says Cheng Li, Brookings’ director of China research, but only slightly: “The property bubble, shadow banking and the state-owned enterprise monopolies are far more risky” problems for China’s economy, he told the New York Times.

Features Icon
show comments
  • bannedforselfcensorship

    Just as US financiers always find ways around these restrictions, Chinese bureaucrats will too. They don’t have anything else to do all day but dream up new ways of corruption.

    (They don’t build these palaces just for a personal perk; they take a large slice of the entire project’s worth.)

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service