China’s city governments face debt trap risks: report

It would be a mistake for city governments to use more debt to stimulate the economy, S&P Global Ratings said.

City governments in China are at risk of falling into a debt trap, S&P Global Ratings reported. 

“We believe China's city governments face wide-ranging fiscal conditions," said S&P Global Ratings credit analyst Wenyin Huang. 

"The financing options open to the poorer, more indebted cities are narrowing. We believe further that it would be a mistake for these governments to use much more debt to stimulate their economies."

In a commentary, S&P Global Ratings noted that the group of local governments with low income and a high debt level will particularly face the most pressing need to reduce spending and lessen debt risks. This will likely dampen growth. 

In contrast, the group with low income and low debt may have a higher income potential. 

Moreover, S&P Global Ratings reported that key state-owned enterprises in low-income regions are experiencing strained financing conditions. This will prompt local governments to raise more funds directly through the government bonds, rather than through the enterprises.