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Snapshots of China's troubled -- and troubling -- local economies

Small-town financial woes threaten Xi Jinping's big ambitions for the nation

Chinese President Xi Jinping and his administration face a challenge from struggling local economies.   © Reuters

FENGXIN, China Chinese President Xi Jinping has announced an ambitious goal of turning China into a global superpower to rival the U.S. by the middle of this century. But this grand vision is premised on strong, continued economic growth -- and local economies around the country are starting to show signs of strain that could derail Xi's ambition.

This reporter recently visited some of the regions that are struggling to keep their heads above water.

Fengxin County is located some 800km southwest of Shanghai. It is a typical Chinese village, where old buildings are easy to find and chain stores such as McDonalds and Starbucks few and far between. The county government building is surrounded by a moatlike waterway, and there is a guardroom at its only entrance.

Parked in front of that guardroom was what appeared to be an unmarked police car. It would not be unreasonable to conclude that the unusually heavy security had something to do with the fact that the county government is 300 million yuan ($45.2 million) behind in its payments to a local construction company.

In March, a court in Jiangxi Province ordered the government to pay back its debt with interest, threatening to seize 324.11 million yuan of the county's savings and other assets.

But Zhang Zhengbing, the owner the construction company, is still waiting. "I've only received 15 million yuan," he said.

Zhang's company took the government to court over its failure to pay for a river development project in which the company had been involved.

In explaining its failure to pay for the project, the county government said its plan to raise the necessary funds through a condominium development project had been delayed by alleged misconduct of the contractor involved. It also claimed that it had decided to use what money it had to cover migrant workers' unpaid wages first.

While the court formally rejected these claims, the county has yet to pay the bill. The 300 million yuan in arrears is equivalent to 15% of the county government's annual revenue.

Around 10 buildings -- half of them unfinished -- were sitting in the plot for the condominium project that was supposed to pay for the river development project and other civil engineering works.

A town facing a debt crisis has little hope of attracting investment. This leaves Fengxin with few options other than relying on its traditional textile industry to carve out a viable economic future for itself.

Despite the efforts by the central government to cool the overheated real estate market in major cities, property prices remain high in locations like Shanghai, Beijing and Shenzhen.

But while China's urban real-estate boom -- and bubble -- has attracted much attention, the picture is quite different for rural areas with no competitive industries and poor access to major cities. Land prices in these areas are languishing, making life difficult for local governments that depend on land sales for revenue.

Longpao Jiedao is a town of about 60,000 in the Liuhe District of northern Nanjing, the capital of Jiangsu Province.

The town, whose only notable industry is growing vegetables that are sold in Nanjing, owes 4 million yuan in back payments for telecommunications projects, according to an official document.

Bus service is just about the only means of transportation for the residents. Since Longpao Jiedao is not within commuting distance of Nanjing or any other large city, there is no demand to build condos or houses for commuters.

Most of the people on the village's only shopping street are either elderly or children. "I've never heard of real estate prices rising in the community," one local said. Situations like this make it hard for many governments in rural China to pay back even small amounts of debt.

BEYOND LOCAL In August, one local government's debt problem came close to triggering a large-scale credit crisis. The municipal government of Ningxiang, in Hunan Province, sent notices to banks telling them that it was invalidating the collateral that borrowers had put up for issuing bonds and taking out loans. Those borrowers included an investment and loan company under the city's supervision.

The action raised concerns about a wave of debt repudiation and provoked an outcry among banks. The municipal government quickly reversed its decision in response to the criticism.

Ningxiang has a large industrial park, and while construction machinery maker Sany Heavy Industry has a factory there, many other plots are unoccupied. There is also a business startup center for students, but only a small number of entrepreneurs have moved in, and most of the rooms in the center remain empty.

The industrial park is apparently larger than the city can support, but the municipal government has little choice but to promote such costly, large-scale projects if it hopes to achieve economic growth targets.

In one corner of the park, construction is underway on a high-rise that the government says will become an "innovation center." Meanwhile, the city's investment and loan company in charge of the project is saddled with unsold inventories that account for 80% of its entire assets.

Given this, it is natural to see the local government's move to invalidate collateral as an attempt to rescue the embattled company.

Whether the Xi administration will take effective steps to rescue financially troubled local governments, even at the cost of slower economic growth, will go a long way toward determining the long-term sustainability of the Chinese economy.

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