China's US$3 trillion hidden debt problem is proving to be difficult to shake, with lower tiers of local government bearing the brunt, according to a report by S&P Global Ratings.
S&P defines hidden debt as off-balance-sheet borrowings that local governments support, who use it to ensure their regions meet central government GDP goals.
"China's central authorities have tried to force local governments to drag their liabilities into view, and onto balance sheets," said S&P Global Ratings analyst Susan Chu. However, along with pressure to support China's economy with investments, local governments will have to deal with "billions of dollars" of liabilities that may scare investors away.
The debt holds steady, the report found, but is now visible on local government balance sheets and focused on projects backed by cash flows. S&P expects on-budget borrowing to increase more than 10% over the next two years.
Top tiers of local government, the wealthiest and best connected, will be better able to weather market disruptions. Lower tiers, with fewer resources to shoulder liabilities, will "have much greater difficulty exiting hidden debt," Chu said.