(Bloomberg) -- Alex Zhang carefully hitched the fortunes of his construction supplies company to some of the wealthiest cities in a coastal sliver of China. Payment from government-back contractors looked assured in Hangzhou, Suzhou and Nanjing — industrial juggernauts sat in a cluster of eight provinces that contribute nearly half of the nation’s gross domestic product.
Fast forward four years, Zhang is owed 10 million yuan ($1.4 million) from finished projects, as even China’s rich regions suffer from the nation’s economic slowdown. Desperation drove him to splurge 100,000 yuan on two meals for shadowy intermediaries, who emerged boasting of powerful connections in Beijing to help him get paid and find new work — a last-ditch effort Zhang said didn’t seem likely to free his money.
“I haven’t seen a single successful case yet,” said Zhang, 38, of the middle-men preying on those with mounting bills. “Local governments are running out of cash. It takes years to get paid. We’ve been squeezed hard — I just want to quit.”
Zhang is not alone. The fiscal austerity that’s gripped poorer parts of China since the pandemic is now spilling into provinces that long seemed slowdown-proof, threatening the Communist Party’s ability to propel its $18 trillion economy. Preserving that earning power was given fresh urgency by the election victory of Donald Trump, who has pledged to choke off critical Chinese exports.
A centerpiece of Beijing’s effort to arrest the decline is a 10 trillion-yuan lifeline for local governments to refinance their “hidden” liabilities onto public balance sheets. While the program accounts for a fraction of the 60 trillion yuan the International Monetary Funds says provinces owe in hidden debt, the goal is to free up funds for authorities to defuse a potential credit crisis, pay salaries, settle corporate arrears and invest in new projects — steps critical to getting funds circulating in the economy again to revive growth.
Troubles plaguing China’s wealth belt accentuate the scars of an unprecedented property downturn and go some way toward explaining the government’s recent embrace of stimulus. Determining whether the debt swap program can succeed in rescuing rich provinces will likely take months, if not years.
Interviews with scores of people across the new, unlikely hotspots of China’s fiscal distress revealed a skepticism for the project, over concerns corruption or inaction from local officials would undercut its roll-out, perceptions of a long lag time for impact, and fears it still leaves a huge pile of debt to be serviced. Several residents asked for anonymity to discuss politically sensitive issues.
Beijing has been here before. When central officials back in 2015 dished out a 12 trillion yuan, three-year debt swap, they effectively swore that was the "last supper" for local governments, said Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong. Central officials vowed, from that point on, authorities wouldn’t be liable for any local borrowing other than bonds.
"The only reason central officials would reverse course is because they assess the fiscal squeeze at the local level is severe, pervasive and threatening the entire economy," he added. "I think this can help many provinces to get back on track fiscally, but there’s no going back to the old model. The new deal seems to be the central government will shoulder much more of the heavy fiscal lifting."
Only a year ago, wealthy provinces like Zhejiang, where Zhang does much of his work, were riding to China’s economic rescue, cast to play a “pivotal role” in supporting growth nationwide. But by September, as plans to pump out stimulus began to take shape, President Xi Jinping had to confront warnings from officials in at least one major coastal province that it would struggle to hit China’s economic growth target, Bloomberg News has reported.
As the fallout spread, it hardly mattered where regions once stood in the economic pecking order. In a worrying sign, the southern powerhouse of Guangdong in the first nine months of the year clocked its weakest expansion since the pandemic. The housing crash that’s made developers reluctant to purchase land choked off a key source of income, just as local governments collected less tax from struggling companies. A debt pile-up also made interest payments a growing burden.
One county official in Guangdong complained his income was slashed by a third this year, as his bonus got cut. One relative’s employer, a government-funded nonprofit organization, delayed wages to the end of each month from the start, he said. Though he reckons the debt swap program will ease the repayment squeeze on government funds and remains confident about China’s growth outlook, the official said it will take a long time for the economy to stabilize.
An air of thrift now pervades Suzhou, a city in Jiangsu province less than two hours’ drive from Shanghai. On paper, it boasts a local economy larger than Chile’s and per capita income nearly double the national average at over $10,200. The city — often called the Venice of the East — is a big tourist draw, famous for preserving elegant gardens built by retired officials in ancient times.
But an early winter visit also revealed an anxiety bubbling beneath the surface.
Along Pingjiang Road, where stone bridges straddle a clear river lined with side alleys, one stall owner hawked fridge magnets at a 15% discount. Nearby, a baker tried to convince two middle-aged customers to pay 8 yuan for his plum rice cakes by offering a buy-one-get-one-free deal — without even being asked for a price cut.
A street cleaner lamented she’d taken this job after retiring two years ago — all because she could barely make ends meet on her pension of just over 1,000 yuan a month. Even with the additional income, she said she was still unable to spend on anything beyond daily necessities.
Ivan Jiang, 35, who works for an institution that provides testing services for manufacturers, is fortunate his salary is stable and arrives on time. But he is less willing to spend than before due to “deep losses” in stock investments and worries about geopolitical risks. China’s stimulus blitz has put this year’s national growth goal back in reach, but as Suzhou’s vaunted export machine confronts fears of higher US tariffs under the president-elect, next year’s outlook seems uncertain.
Taking a sip of coffee at a Starbucks near his work, Jiang says he fears another trade war could force foreign companies to move their production out of Suzhou and inflict losses on his organization and family. His wife works for a foreign-backed petrochemical company.
Foreign trade in Suzhou accounts for 6% of China’s total and nearly half of Jiangsu’s overall volumes. About 18,000 foreign companies operate there, with a combined investment of over $160 billion — the third largest in China. “Many families in Suzhou will be affected because very often both the husband and wife are employed by foreign companies,” Jiang said. “Their pullout from the city means job cuts here.”
What makes it an especially precarious moment for even well-off cities like Suzhou is that the local government is running a tight fiscal ship.
Authorities have scaled back salary and benefit payments for employees and reduced investment. Two years after reopening from Covid lockdowns, the Suzhou city government’s budget for meetings, service outsourcing, government car operations and maintenance is still at least 10% below its pre-pandemic levels.
Falling land sales are driving down Suzhou’s investment. Spending under a main budget for infrastructure is expected to decline 17% this year, after a 10% drop in 2023, according to Bloomberg calculations based on its budget numbers.
Outside of Suzhou’s historic core in Wuzhong district, work that was meant to start in September 2021 is finally underway on a 1.3-kilometer-long road providing access to a bridge. Government officials blamed the delay on a project redesign, but a security guard directing traffic near the project site said the rumor circulating among disgruntled workers was Wuzhong lacked funding, with relocation compensation proving too costly.
It’s a problem playing out across the country. A crackdown on so-called local government financing vehicles — used to borrow on behalf of provinces and cities to fund infrastructure investment — is a further constraint on spending. China’s central government will do more heavy lifting next year, with reported plans to increase the headline budget deficit by 1 percentage of GDP to expand spending.
While dwindling funding is hampering new investment, it’s by no means the only issue holding officials back from pursuing growth. The government’s anti-corruption campaign, for one, is making some local authorities inclined to do less to avoid making mistakes.
Audits and endless investigations into suspected graft are eroding officials’ desire to innovate at the local level, according to a senior partner at a law firm in Beijing who specializes in infrastructure financing and represents builders seeking delayed government payments.
Even though the 10-trillion-yuan debt swap plan sparked hope of unblocking some stalled payouts, the lawyer warns it so far remains wishful thinking, expressing doubt local officials who are “lying flat” can maximize the benefits of the program.
A revolving door of local leaders isn’t helping. Provincial party chiefs at the beginning of Xi’s second term typically spent five years or longer on the job in the wealthy regions, but that’s shortened significantly in some places. Shandong's former party chief was in the role for nearly nine years until March 2017. Since then, the province has seen three party leaders, while Zhejiang has had four in the same window.
Shorter tenures might stop cadres building up cliques, but they also make it harder for local chiefs to fully grasp the problems on their doorstep, let alone have time to solve them.
Zhang is still coming to grips with the aftermath of his failed construction materials business.
Short of cash to invest in new projects, he’s now running an e-commerce firm selling food and drinks via live-streams. While not aware of the fine details of government plans to reduce local hidden debt and settle corporate arrears, his worry is any stimulus from the top could get bogged down in corruption and cronyism.
“My feeling is many of the good policies offered by the government have failed to reach the average people or small business owners,” he said.
--With assistance from Jing Li, Qizi Sun, Shuiyu Jing and Chongjing Li.
©2024 Bloomberg L.P.