In China's Hugely Indebted Cities, Some Big Bills Are Coming Due

By Frank Langfitt

Published January 28, 2014 at 9:38 AM CST

Wuhan, in central China, is in debt to the tune of a reported $33 billion — nearly twice the city's GDP. This 17-mile highway sat dormant for two years after banks cut off funding as Wuhan's debt ballooned. Work on the road resumed last year, but the construction company still hasn't been paid.

In recent years, rampant borrowing has driven a significant chunk of China's economic growth. The bill is now becoming clearer — and it's big. Late last year, China revealed that local governments owe nearly $3 trillion – more than the gross domestic product of France, the world's fifth-largest economy.

One city with a sizable debt problem is Wuhan, an industrial hub that lies along the Yangtze River in central China's Hubei province. With a population of 10 million, Wuhan has a growth rate of 11 percent and is known for its car factories and many universities.

According to China's state media, it also owes more than $33 billion, nearly twice Wuhan's GDP. Banks became so concerned that they cut off funding for a 17-mile highway. A local current affairs TV show covered the debacle.

A scavenger pounds away at the rubble that was recently a neighborhood along the Yangtze River in Wuhan. The city is turning the area into a river drive.

"The River North Highway has been under construction for many years and still isn't finished," read one of the show's hosts, quoting a citizen complaint via the Internet. "It's the pits. How tragic!"

On the show, Zhao Zhenyu, a university professor, bashed the government for launching a project it couldn't afford.

"Even though you knew the project was not ready to proceed, you still insisted on holding a ribbon-cutting ceremony," Zhao scolded. "I don't know if this was lower-level officials deceiving their bosses or bosses just making arbitrary decisions."

Wuhan Tries Novel Ways To Offset Costs

Work on the project, which lay dormant for two years, has begun again, but a supervisor told NPR that there is still no financing and that the company building the highway hasn't been paid in a year and is still owed about $16 million.

Wuhan government officials did not return emails or phone calls seeking comment on the city's debt problem. They have, though, tried novel ways to offset the massive cost of infrastructure, including the city's first subway lines.

"Wuhan subway's advertising rights were auctioned off and the government recovered about $300 million," says Wu Xinmu, an economics professor at Wuhan University.

Officials even sold the naming rights to a subway station to a company that sells frozen duck parts, but dropped the idea after people complained. Wu says such schemes don't bring in enough money and the city has to control its borrowing.

"The government can't just rack up an unlimited amount of debt, even if the projects are for the public good," says Wu.

A Stacked System Means Default Unlikely

When Americans hear these kinds of debt figures, they might think of analogies close to home, such as last year's bankruptcy in Detroit, which couldn't pay an estimated $18 billion in obligations.

Parts of Wuhan seem like an open construction site. Here, heavy machinery clears the way for a river drive while construction continues on a bridge across the Yangtze River.

In fact, Wuhan's debt is much larger than Detroit's, but economists say the odds of Wuhan – or any other Chinese city — going bankrupt is close to zero.

"The problem is not that there is going to be a local government default on the banks," says Andy Rothman, who lives in Shanghai and works as the China strategist for CLSA, a brokerage firm. "That's not going to happen."

He says cities won't go under because the Communist Party controls the financial system.

"It's nothing like the way we think about the United States, because this is in many ways a fake financial system," Rothman adds.

In the case of Detroit, the local government was at odds with private creditors, unions and pension boards. In Chinese cities, the Communist Party is on both sides of the loans.

"What we have in China is a Communist Party-controlled bank lending money to a Communist Party-controlled local government to build Communist Party-approved public infrastructure," says Rothman.

A Slowdown Needed

He and many other economists in China say Beijing can handle local governments' huge debts, because it still has a ton of money and China's annual GDP is over $9 trillion.

But, Rothman adds, things have to change. Spending on public infrastructure continues to grow at 20 percent a year.

"That's just unsustainably fast," he says.

It's unsustainable, because if it continues it could eventually threaten China's financial system.

As a result, economists say that rapid increase in infrastructure spending must ease. That will mean fewer new highways and subway lines, which many cities in China's interior still need and, ultimately, will spell slower growth for the country's once-blistering economy.