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 casinos. 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 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.
