China faces ‘big’ debt risks in drive to narrow urban-rural gap, Beijing forum told

China must guard against debt risk in rural areas as it pushes to revitalise the countryside and narrow the urban-rural gap, Chinese officials and academics have warned.

Addressing the Tsinghua PBCSF Global Finance Forum, they said China’s campaign to push rural funding and infrastructure could give rise to big financial risks – given the inefficient agricultural sector, lack of loan collateral options, and rural residents’ preference to work in cities.

“There is quite big uncertainty [in the rural revival drive] from the perspective of investment and financing,” Zhou Mingshan, a finance professor and deputy president of the Zhongnan University of Economics and Law, told the forum in Beijing on Saturday.

A weak agricultural sector made investment risky, while rural residents – who are mostly low-income – were not good at using financial tools, Zhou noted.

The biggest gap in rural investment related to infrastructure, which often featured high costs but low benefits, he added.

Wang Yan, deputy head of the Ministry of Agriculture and Rural Affairs’ budget and finance department, highlighted the lack of security options for loans in rural regions due to an undeveloped property rights exchange market.

“One problem that has emerged during the development of rural financing is that farmers think the threshold is too high, while financial institutions find there is too much risk,” Wang said.

The central government has pledged more financial support for rural areas in recent years as President Xi Jinping pushes for rejuvenation of China’s vast rural regions in pursuit of “common prosperity”.

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The balance of loans relating to agriculture and rural development totalled 49.25 trillion yuan (US$7.03 trillion) last year, up by 14 per cent from 2021, according to data from China’s central bank.

But there have been growing concerns over risks, as excessive debt becomes one of the biggest challenges for the world’s second largest economy.

Debt raised by local government financing vehicles had soared to 66 trillion yuan, or about half of China’s annual gross domestic product, an IMF report said in February. This was nearly double the figure in 2018, which stood at 35 trillion yuan.

According to Dang Guoying, a former researcher at the Institute of Rural Development under the Chinese Academy of Social Sciences, more than private investment in rural areas, the real concern was money spent on public services.

“There are many examples of individuals losing money after investing in rural areas or agricultural projects, but they are not so harmful as it is a small amount compared to the total rural investment,” he said in a telephone interview.

“What is alarming is that we have been spending a huge amount of money on public infrastructure in the countryside but the government never evaluates risks. There are just no people to use these facilities – all have left for urban areas to seek better-paid jobs.

“So it’s a big waste and means a big financial burden for the government.”

China tells banks to support rural infrastructure, but don’t add to hidden debt

Villages across China have faced a rising debt burden in recent years, as they have sought to improve infrastructure and public spaces, the China Democratic League, one of the country’s eight legally recognised minor political parties, said in its report to the national legislative sessions in March.

In central Hunan province, for example, over 70 per cent of village committees were in debt in 2020, with the average amount of debt standing at 1.08 million yuan, the report said.