Debt-Laden Local Governments in China Encouraging Start Ups

Amid rising debts, authorities in China’s coastal province of Jiangsu are encouraging workers at state-owned enterprises to participate in “off-duty entrepreneurships” and take leave without pay to start their own businesses.

News of the new measure came ahead of China’s two-day Central Financial Work Conference, attended by President Xi Jinping, who pledged to set up a long-term mechanism to resolve debt risks tied to local authorities and signaled a willingness to expand central government borrowing.

China’s local government debt reached 92 trillion yuan ($12.58 trillion), equal to 76% of the country’s economic output in 2022, according to the Reuters news agency. That was up from 62.2% in 2019.

Participants in the meeting, which concluded Tuesday, included Li Qiang, Zhao Leji, Wang Huning, Cai Qi, Ding Xuexiang and Li Xi, members of the Central Committee of the Chinese Communist Party.

They also pledged to “optimize the debt structure of central and local governments” and provide more funds for innovation, high-tech manufacturing, green technology and small-to-medium size companies.

In 2022, the gross domestic product of Jiangsu province, neighboring Shanghai, amounted to approximately 12.29 trillion yuan, or $1.68 trillion, while it owed a debt of 2.069 trillion yuan, or $282.8 billion.

Amid the increasing local debt, the Jiangsu provincial government launched a program in early October to encourage 200,000 state-owned enterprise workers every year until 2025 to start their own businesses, especially those who would do so on leave without pay.

The program especially aims to support scientific researchers, including professional and technical personnel from universities, scientific research institutes and other state-owned enterprises, in starting businesses.

They are encouraged to apply the results of their scientific and technological research to other part-time or temporary jobs, collaborate on projects outside their regular jobs, and become entrepreneurs on a leave-without-pay basis from their institutions.

Jiangsu province will retain their employment relationships for three years and continue to pay for the entrepreneurs’ social insurance and occupational annuities at their original workplaces. They will also be promoted and receive salary increases at the normal pace.

Fang Tsung-yen is an assistant researcher at the Institute for National Defense and Security Research in Taipei. Fang said China cannot reverse the economic downturn in the short term, so the local governments have to reduce the financial burden in the hope of stimulating economic prosperity.

She said the local government cannot force people to quit their jobs, so it is seeking other ways to reduce its payroll.

“Keeping your jobs sounds nice, but it’s actually just because [the local government] can’t afford to pay you. So [it] will encourage you to start your own businesses in the hope of reducing its financial burden,” she said.

The news triggered heated discussions online. One netizen, whose online name is Techno, said on Zhihu, the Chinese equivalent of Quora, “[It] may cause a severe loss of state-owned assets.”

A netizen commented under the name of BigBrother, “There are more people eating public food than contributing to public food. They don’t have money to pay salaries.”

Some others suspect the program may become mandatory.

“They probably will have a quota for each enterprise,” someone commented under the name of Euphemia66.

Some think this is a way to lay off people and cut jobs.

“Now, they say, ‘We give you a chance to start your own businesses.’ In a few years, they will say, ‘Your enterprise has a quota of three entrepreneurs this year,’ ” a netizen commented under the name of Mulei, the Knight of Smoke.

“You think you would leave for three years, and during that time, you would take advantage of your background in politics to benefit your business, and you would be financially independent. When you are back to the state-owned enterprise, you can live an easy life in old age.

“But actually, three days after you leave your enterprise, they would eliminate your position. And three years later, the enterprise wouldn’t exist anymore.”

Jiangsu’s government is not the only one affected by the economic downturn. Multiple provinces, including Jiangxi and Fujian, have announced collective salary reductions for civil servants, according to Chinese news website Toutiao.

The central government restricted the ability of local governments in 12 heavily indebted regions to take on new debt and limited any new state-funded projects, according to Reuters, quoting three sources. The 12 regions have to get approval from the central government to launch specified projects.

Tan Yao-nan, chairman of the Hui-li International Policy Advisory Group in Taipei, told VOA that fiscal problems — and especially local debt — are the biggest challenges China currently faces. He said China needs more than just expanding domestic demand or imports and exports.

Chinese authorities on October 24 announced the issuance of 1 trillion yuan, or $137 billion, in government bonds, which will further expand the central government’s fiscal deficit to 4.88 trillion yuan, or $666.9 billion, this year.

Tan said that if the debt of all central and local public sectors is combined, it is nearly three times the size of China’s GDP, which makes the severity of China’s debt problem far greater than that of neighboring Japan.

“Who will hold these government bonds?” Tan asked. “It must be held by major state-owned financial institutions and even provincial governments, so it is actually just debt relief. It’s just a cycle, and it doesn’t solve the long-term problem.”

The meeting that ended on October 31 signaled Beijing is considering further measures to resolve several sources of financial risk, including local government debt. But it didn’t provide any specifics.

Some of China’s biggest banks have been offering local governments loans with long maturities and temporary interest relief to prevent a credit crunch since the second quarter.

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