LEIYANG, China -- The little-known Hunan Province city of Leiyang drew unwanted attention nationwide in early June after failing to pay civil servants, exposing the municipality's fiscal woes amid a crackdown on shadow banking.
"I have been paid. No need to worry," said a Leiyang city worker of more than 20 years, who gave only the name Liang, showing a deposit statement. Payments had been put in on June 8 and June 22 for about 3,900 yuan ($583). The former was a late payment for May, while the latter was for June, right on time.
"The city is moving away from its main industry of coal mining, so a lot of things can happen," Liang said. Many of the small mines surrounding the city were quiet as the municipal government has shut them down to cut overcapacity.
Leiyang's finances have become strained during this shift. Tax revenue fell 13% from 2014 to 720 million yuan in 2016, while spending climbed 50%. Leiyang relies on aid from the central government for 60% of its income.
Despite a tight budget, the city should have set aside money for employee wages. The late payment may therefore have resulted from some unexpected expense.
Local government borrowing in China is strictly regulated. Most cities must instead use state-owned local government financing vehicles like Leiyang City and Rural Construction Investment, which tap banks or the bond market for money to fund infrastructure projects.
In 2015, Leiyang issued through its financing vehicle two tranches of bonds totaling 1.9 billion yuan, resulting in an annual interest payment of 130 million yuan. Principal repayment also began in 2018. The city is scheduled to pay back 380 million yuan each year from 2018 to 2022, and the first payment of 140 million yuan was made in April, the month before it failed to deliver workers' salaries.
Previously, local governments could have covered the shortfall by turning to the country's shadow banking system of unregulated lenders. But President Xi Jinping has begun cracking down on such lenders as he moves to rein in financial risks. Leiyang may be short on funds as it searches for financing from other sources. "The city is apparently rushing to sell its assets," said the owner of a shop outside the municipal offices.
A local Communist Party official also said that although the financing vehicle operates independently of the city, the central government's new financial regulations are having a big impact.
Leiyang is not the only city to fall behind on its obligations. Teachers in Anhui Province city of Luan were met with police violence this May as they protested the nonpayment of salaries. Military veterans also demonstrated in Jiangsu Province recently to demand steady pension payments. There have been 5,000-plus cases of local governments and financing vehicles defaulting on obligations, such as unpaid construction costs.
China's Ministry of Finance puts local government liabilities at 16.5 trillion yuan, but the International Monetary Fund estimates the figure at more than 30 trillion yuan because of hidden debts that have not been officially accounted for. The national auditor said in April that six municipalities from five provinces and regions had illicit loans totaling 15.4 billion yuan.
"Local governments cannot pay salaries and have no intention of repaying their debts," a former official of the National People Congress' Financial and Economic Affairs Committee said in May. "They cannot even pay interest, let alone the principal."