Local governments in China with high levels of debt are promoting the growth of new businesses.
As the debt continues to increase, officials in China’s Jiangsu province are promoting the idea of “off-duty entrepreneurship” for employees at state-owned companies. They are also encouraging workers to take unpaid leave in order to pursue their own business ventures.
Prior to the two-day Central Financial Work Conference in China, President Xi Jinping announced a new measure to address debt risks associated with local authorities. He also expressed a readiness to increase borrowing by the central government and establish a lasting mechanism for resolving these risks.
Reuters reported that in 2022, the local government debt in China amounted to 92 trillion yuan ($12.58 trillion), which accounted for 76% of the country’s economic output. This was a significant increase from the 62.2% recorded in 2019.
Attendees of the Tuesday meeting included members of the Chinese Communist Party Central Committee, such as Li Qiang, Zhao Leji, Wang Huning, Cai Qi, Ding Xuexiang, and Li Xi. The meeting has concluded.
They promised to improve the financial arrangements for both national and local governments and allocate additional resources towards advancements in technology, high-tech production, eco-friendly technology, and small to medium-sized businesses.
In 2022, Jiangsu province, which is located near Shanghai, had a gross domestic product of around 12.29 trillion yuan or $1.68 trillion. However, it also had a debt of 2.069 trillion yuan or $282.8 billion.
The Jiangsu provincial government initiated a program in October to incentivize state-owned enterprise employees to pursue entrepreneurship, targeting 200,000 workers annually until 2025. The focus is on those who would take a leave of absence to start their own businesses.
The primary goal of the program is to assist scientific researchers, such as university professors and technical staff from research institutes and government-owned companies, in launching their own businesses.
Individuals are urged to use the findings from their scientific and technological studies in additional part-time or temporary employment opportunities, work together on ventures unrelated to their main jobs, and pursue entrepreneurship while taking a leave of absence from their institutions.
The employment contracts of entrepreneurs in Jiangsu province will be maintained for a period of three years, during which their original workplaces will continue to cover their social insurance and occupational annuities. Additionally, they will have opportunities for promotion and regular salary raises.
Fang Tsung-yen, an assistant researcher at the Institute for National Defense and Security Research in Taipei, stated that China is unable to quickly recover from the economic downturn. As a result, local governments must decrease financial burdens in order to potentially boost economic growth.
According to her, the local authorities are unable to compel individuals to leave their jobs. Therefore, they are exploring alternative methods to decrease their workforce expenses.
She mentioned that the idea of retaining your jobs may seem appealing, but in reality it is due to [the local government] not having enough funds to pay you. Therefore, [it] will urge you to establish your own businesses in order to lessen its financial strain.
The announcement sparked intense debates on the internet. A user, known as Techno on Zhihu (China’s version of Quora), stated, “[It] could result in significant depletion of government-owned resources.”
A social media user with the username BigBrother posted a comment stating, “There seems to be a greater number of individuals consuming public food rather than actively contributing to it. This is likely due to a lack of funds to cover salaries.”
There are others who believe that the program could potentially become a requirement.
Euphemia66 commented that there will likely be a set limit for each company.
There are some who believe that this is a method for reducing staff and eliminating job positions.
A person named Mulei, who goes by the username “Knight of Smoke,” commented that currently, there is an opportunity to begin one’s own business. However, in the future, there may be a limit of three entrepreneurs per year for each enterprise.
“I believed that by leaving for three years, I could utilize my political background to benefit my business and achieve financial independence. Upon returning to the state-owned enterprise, I could live comfortably in my old age.”
“However, three days after departing from your company, your position would be eliminated. And in three years’ time, the company would cease to exist.”
According to the Chinese news website Toutiao, various provinces such as Jiangxi and Fujian have also implemented salary cuts for government employees due to the economic decline. This decision does not only impact the government of Jiangsu, but multiple provinces as well.
According to three sources cited by Reuters, the central government has imposed limitations on the 12 highly indebted regions, preventing them from taking on additional debt and initiating any new state-funded projects. These regions must seek approval from the central government before beginning any designated projects.
According to Tan Yao-nan, who is the head of the Hui-li International Policy Advisory Group in Taipei, China’s major hurdles at present are fiscal issues, particularly pertaining to local debt. He believes that simply increasing domestic demand and trade is not enough to address these challenges.
The Chinese government announced on October 24 that they will be releasing 1 trillion yuan (equivalent to $137 billion) worth of government bonds, resulting in the central government’s fiscal deficit increasing to 4.88 trillion yuan (equivalent to $666.9 billion) for the year.
According to Tan, when the debt of both the central and local public sectors is added together, it is almost three times the size of China’s GDP. This highlights the significant issue of China’s debt, which is even more severe than that of Japan, a neighboring country.
“Tan inquired about the holders of these government bonds. He pointed out that they are likely held by large state-owned financial institutions and provincial governments, which essentially means it is a form of debt relief. However, this is just a temporary solution and does not address the underlying long-term issue.”
The recent gathering on October 31 indicated that Beijing is contemplating additional actions to address various sources of financial uncertainty, such as local government debt. However, no details were disclosed.
Several large Chinese banks have recently been providing loans to local governments with extended repayment periods and temporary reduction in interest rates in order to avoid a shortage of credit since the beginning of the second quarter.