China has issued a warning to local governments against using funds allocated for technological innovation for alternate purposes, such as paying their mountain of debt.
The warning came as part of revised rules that China’s ministry of finance published on Wednesday, directing local governments on how to use tech-related funds.
The rules reiterated the need for local governments to report wasteful and illegal use of tech funds to central government ministries, a document on the website of China’s ministry of finance showed.
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They also warned against the use of such funds for debt repayment, pensions and civil servant salaries.
Provincial-level governments in China are burdened with nearly $13 trillion of debt. That’s about 76% of the country’s economic output in 2022.
A major source of the debt was years of spending on infrastructure and poverty schemes, often through local government financing vehicles (LGFVs). The problem was exacerbated, however, after the Covid-19 pandemic and months of strict lockdowns piled on costs for local governments, while cutting off their revenue sources.
An eventual meltdown in the debt-laden property sector came as the last straw, with real-estate accounting for a major source of provincial revenue. In its heyday, the property sector accounted for nearly 30% of China’s GDP.
On Tuesday, Chinese finance news group Caixin Global reported that China’s local governments made bond interest payments worth $174 billion last year alone. That was a record figure — up by almost 10% from 2022.
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The technology problem
Despite the looming debt pile, local governments are also under pressure to drive spending on science and technology as Beijing is increasingly shunned by the West.
Growing US chip export controls, for instance, have led Beijing to mobilise billions of dollars to accelerate China’s chip self-sufficiency. Chinese President Xi Jinping has repeatedly stressed the need for China to become self-reliant in advanced technologies to avoid “being strangled by foreign countries”.
Provincial governments accounted for at least 60% of the total government expenditure on technology in 2022, the Rhodium Group said in a report in December 2023.
Last April, for instance, China’s southern province of Guangdong announced a $4.4 billion expansion of its semiconductor fund. Later in December, it committed another $1.5 billion towards setting up a new chip fund.
Guangdong’s debt, meanwhile, climbed up to nearly $422 billion as of 2023-end, according to a report by Caixin.
An improvement in the financial health of local governments will be challenging this year as well, as the world’s second largest economy continues to struggle in its post-Covid recovery, the property market slump drags on and the state of Chinese developers continues to worsen.
But they will still need to keep a focus on boosting technological innovation.
In its document on Wednesday, China’s finance and science and technology ministries asked all local governments to “thoroughly implement major national policies for scientific and technological reform and development, solidly promote self-sufficient innovation, and enhance scientific and technological innovation capabilities.”
- Reuters, with additional reporting by Vishakha Saxena
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