Contractors hit as China local government defaults rise
Slowing economy puts strain on public finances and raises
risk of social unrest
China’s local governments face a record number of lawsuits
for failing to pay their contractors on time as the country’s slowing economy
puts a strain on public finances. The financial outlook has deteriorated so
markedly that analysts have warned that there is a risk of social unrest.
Chinese courts have listed 831 local governments as being in default in the
first 10 months of this year, compared with 100 in the whole of 2018. The value
of these local authorities’ overdue payments grew by more than 50 per cent from
Rmb4.1bn at the end of last year to Rmb6.9bn ($984m) at the end of October. The
totals do not take into account the amount owed by local government finance
vehicles and companies operated by municipal or provincial officials, more than
1,000 of which have been listed as defaulters over the past three years.
The large increase in cases provides a glimpse into the
worsening financial position of many Chinese local governments as they struggle
to revive economic growth that fell to a 30-year low of 6 per cent in the third
quarter. “The surge in government defaulters could lead to a social crisis with
workers taking to the street and protesting against official agencies. That’s
the worst-case scenario for Beijing,” said Chen Zhiwu, head of the Asia Global
Institute at the University of Hong Kong. When you become a government
contractor, you don’t expect to get paid once your work is completed . . . you
expect an IOU and an uncertain payment date Wang Dianxue, Beijing-based lawyer
Andrew Gilholm, director of China and Korea analysis at Control Risks, a
consultancy, also sounded a warning. “If more frequent, high-profile defaults
impact social stability and government credibility, it will become a national
problem, albeit one that looks unlikely now,” Mr Gilholm said.
Local governments are registered as defaulters after failing
to follow court orders to pay. Most of the defaults have occurred in counties
and towns that are known to be operating under a tighter budget than cities and
provinces. Liu Kun, China’s finance minister, said in March that it would be a
“major political task to ease financial stress” among county and township
governments. China’s lower-tier governments are under financial stress because
their revenue falls far short of their rising public expenditure obligations in
areas such as education and healthcare. Local governments, for example, spent
Rmb3.9tn on education in 2017, up from Rmb1.1tn a decade ago. That has forced
many cash-strapped governments to pay vendors on credit, said Wang Dianxue, a
Beijing-based lawyer who has represented contractors on government default
cases. “When you become a government contractor, you don’t expect to get paid
once your work is completed,” said Mr Wang, “you expect an IOU and an uncertain
payment date.”
China’s economic slowdown is putting extra stress on local
governments that have seen fiscal revenue growth in the first three quarters of
this year fall to 3.1 per cent, an 11-year low. In the eastern province of
Shandong, the Honghe town government has no firm plans to service a Rmb26m debt
it owes to a local real estate developer despite a court ruling that the
payment must be made by May. Recommended China Economic Slowdown China’s waning
appetite for stimulus weighs on global economy “We will pay off the debt when
we have more funds available,” said an official from Honghe. Some large cities
are also being sued for failure to pay. A court ruling last month named
Nanchang, capital of the eastern province of Jiangxi, a defaulter after the
city reneged on a payment of Rmb161m.
Making government entities pay their bills is
challenging. There is no official guidance on seizing government assets to
settle overdue payments. China’s political regime prioritises party control
over rule of law and local governments face few consequences if they decide not
to pay. “I can’t think of a single official being punished for failing to pay
contractors,” said Mr Wang, the Beijing lawyer. “They are above the law.”
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