Financial relief efforts for China’s Guizhou province reflect a slight softening of Beijing’s stance on local government debt and could be an indicator of a worsening national economic slowdown. On Jan. 26, China’s State Council laid out plans to assist the southern province of Guizhou in managing its debt load and resuming development projects. Guizhou is one of China’s poorest provinces and has defaulted on 68 debt products since 2018, the most of any province in the country. The State Council will allow Guizhou to renegotiate payment plans with financial institutions and restructure its debt, in addition to raising Guizhou’s debt limit to allow the construction of government-approved (i.e. not real estate) investment projects. This program for Guizhou runs counter to Beijing’s recent efforts to reduce debt risks, and shows Beijing’s concerns for local economic health.

• Beijing has been cracking down on real estate debt over the past year, as shown by its decision not to bail out Evergrande, which has resulted in the privately-owned property manager’s slow-motion and ongoing collapse. These efforts have directly impacted local governments that procure a large portion of their budget from selling land to real estate companies. 
• Beijing has also urged state banks to make it more difficult for local governments to take out real estate loans. In addition, central authorities have pledged to restrict local government debt by reducing their ability to use local government financing vehicles (LGFVs) to facilitate off-the-books borrowing, which contributes to China’s hidden local government debt that is estimated to have exceeded $8 trillion in 2020 (or half of China’s GDP). 
• Beijing’s crackdowns on debt held by local governments and real estate firms have heavily contributed to China’s slowing economic growth, given that real estate investment and management together contribute as much as 29% of China’s GDP. China’s economy is expected to expand by just 5-6% in 2022 compared with 8.1% in 2021. 

Because of their poverty relative to coastal provinces, China’s interior provinces are getting attention from Beijing for special development projects as part of China’s long-standing strategy to reduce geographic economic disparities. But these provinces are also the most vulnerable to national economic headwinds. A Jan. 26 State Council meeting revealed Beijing’s plans for Guizhou as a growth engine for central China and a desire to connect the region’s economic development to the east coast, including the manufacturing hub of Guangdong province. These growth plans may have made Guizhou a high priority for Beijing’s debt assistance. In addition, Beijing is trying to prevent entire provinces from suffering widespread layoffs during fiscal restructuring, even though sub-provincial governments in interior cities have often gone without such assistance.

• Hegang, a prefecture-level city in China’s rust belt along the Russian border, has not been as fortunate as Guizhou province. In late December, the Hegang city government ceased hiring civil servants and announced the beginning of fiscal restructuring — making it the first prefectural-level Chinese city to attempt such restructuring, according to Huachuang Securities Co. Ltd.  
• Coastal Guangdong, one of China’s wealthiest provinces, announced on Jan. 21 that it had moved all hidden debt onto government books. Compared with interior regions like Guizhou, however, Guangdong is estimated to have much lower levels of hidden debt. 

Should the central government assist other debt-ridden interior provinces in the coming months, it could indicate that Beijing is becoming increasingly worried about a prolonged national economic slowdown. China’s interior is home to the bulk of the country’s least productive and most indebted regions. Though Guizhou was particularly vulnerable given its country-leading debt portfolio, many other inland cities and provinces are similarly at risk — struggling under growing fiscal burdens and dwindling real estate incomes, with underdeveloped provinces like Guizhou and Hegang representative of the deep income divide between China’s wealthy coastal regions and interior ones. But amid weak domestic demand and constraints on state investment in 2022, Beijing knows it cannot afford to let these debt-strapped localities sink, as provincial and local governments (including those in poorer inland regions) also drive China’s economic development. Thus, it will be important to watch for other interior provinces receiving further debt relief, as such assistance could indicate China’s economic headwinds are strengthening, as could local financial restructurings like that of Hegang. Beijing will also generally maintain its restrictive stance toward real estate investment, even if it eases back on the most extreme of its loan restrictions to avoid more collapses in line with Evergrande. Unless Beijing is willing to take on even greater national debt in its support of local provinces, “approved” infrastructure projects in Guizhou and elsewhere will likely be insufficient to make up for the local financing void left by real estate. Such national debt would further delay Beijing’s push for “quality economic growth” and worsen any future debt fallout or the austerity measures meant to forestall a fallout.