Zhenjiang suicide-watch guard is the human face of the economic malaise that afflicts smaller cities amid the US-China trade war


,As an out-of-work chemist inJiangsu province, Chen Wei thanked his lucky stars when he found employment as a security guard for China's anti-corruption agency.

For 4,000 yuan (US$579) a month, Chen keeps watch with a colleague in six-hour shifts over detainees, some suicidal, who are awaiting investigation by the Communist Party's organ for policing corruption.

The shift work, which pays a third less than his old job making plastic pellets, is mind-numbing " there's no Wifi-enabled smartphones allowed, no internet, television, books or newspapers of any kind " but far from any hazardous fumes, toxic contamination or industrial accidents. There is even respectability and a hint of kudos in working for the anti-graft agency.

"I had to give up the former job out of safety concerns, especially since the bosses of local factories tend to meddle with machines to achieve unrealistically high production," Chen said in an interview in Zhenjiang city, adding that, among other emotions, he felt a sense of vindication when an explosion at a pesticide plant in neighbouring Yancheng city killed 78 people in March.

"The pay in this new job, similar to an assistant policeman, is lower than before, but there are really not many options."Chen, 30, is the human face of an economic malaise that is slowly spreading through China's small cities, which are caught between the slowest growth pace in three decades and a programme by the central government in Beijing to slash the debt owed by local authorities.

The vice on Zhenjiang " classified as a prefecture level city, with 2.7 million residents " has tightened in the past 12 months, as China's year-long trade war with the United States increased the tariffs on nearly US$200 billion of Chinese products to 25 per cent, including the city's most famous product, black vinegar. Tsinghua University researchers found that 938 Chinese cities have shrunk in the last few years, as their populations have moved out in search of better livelihoods.

About 80 kilometres (49 miles) from Jiangsu's provincial capital of Nanjing, Zhenjiang is probably best remembered as an opium distribution centre during the late 19th century, where Chaozhou dealers used waterborne transport to move their product up river to China's inland markets.

Located on the southern bank of the Yangtze River near the Grand Canal that runs from Beijing to Hangzhou, Zhenjiang is today best known for its production of rice-based black vinegar used in Chinese cuisine.

Economic growth slowed to 3 per cent last year in Zhenjiang, much slower than the nationwide average of 6.6 per cent, making it the slowest-growing city in Jiangsu province, a prosperous region that shares the moniker as China's version of "heaven on earth" with neighbouring Zhejiang province.

But Jiangsu faced outstanding debt of 1.3 trillion yuan as of the end of June, 2018, the highest among China's 34 provincial-level administrative units. Zhenjiang is one of the poorer cities in Jiangsu, with the local government owing 394.3 billion yuan in debt. Annual interest payments run to 21.6 billion yuan, at a rate of 5.5 per cent per annum, according to Guosheng Securities.Apart from a 70.2 billion yuan bond, 82 per cent of the borrowings were debt sold by Zhenjiang's 18 local government financial vehicles (LGFVs), a burden that the People's Bank of China termed "hidden debt" in its 2018 China Financial Stability Report.

Zhenjiang faces 50.4 billion yuan in principal and interest payments this year, an impossible sum for a city that earned 28.4 billion yuan in fiscal revenue in 2017.

Fiscal imbalance is merely one aspect of Zhenjiang's financial woes. The local authority's track record in making money from investments had also been lacklustre.

For a glimpse of the state of the local authority's finances, look no further than the Zhenjiang Finance Building in Dagang district.

Developed by Jiangsu Hanrui Development, the 24-storey office tower was completed in 2013 at a cost of 350 million yuan, designed as a city landmark to attract banks and securities firms to establish a financial services industry foothold.

Six years after its completion, the building now sits mostly empty, except for two tenants who are both subsidiaries of the developer.Hanrui, one of the biggest among Zhenjiang's 18 LGFVs, has 71.3 billion yuan in outstanding liabilities, but generated 41.4 million yuan in net income last year, according to a March bond prospectus. Profitability, which has fallen for three consecutive years, could slide further amid weakening demand for land and commercial property in the district, the company said in its prospectus. Its credit rating was cut by one notch to B from B+ on March 28 by Fitch Rating Agency, with a negative outlook, citing its weak liquidity relative to maturity profile.

The city spent 290 billion yuan on a massive urban construction investment programme between 2012 and 2017, according to a March 2017 government report by Zhenjiang's mayor, Zhang Yefei. He did not disclose the returns of the investments.

Zhenjiang's debt problem is the tip of the iceberg for China's LGFVs, with their combined debt estimated at 7.5 trillion yuan, mostly comprising debt sold in provinces where the public sector dominates the economy, Bloomberg reported last week.

"Places with the most noticeable debt risks, such as the northeast area, Tianjin, Guizhou, Yunnan and Chongqing, all have a bigger state-driven economy," said Wan Qian, China economist at Bloomberg Economics in Hong Kong. "Such a state-led model is less sustainable, and the debt may damage economic growth in the future."

China Development Bank, one of the country's dominant policy lenders, is working on a bailout to swap Zhenjiang's high-interest debt with long-term, low-interest funding coordinated by the Ministry of Finance, Caixin magazine reported last month.

"The debt settlement plan matters not only to a municipal city," said Ivan Chung, head of Greater China credit research and analysis at Moody's Investors Service. "It will make a national standard for resolving local government debt risks, and matters (in terms of) how to establish an effective mechanism to prevent financial and fiscal risks."

Local authorities face a dilemma, Moody's said in a November 2018 report.

On one hand, China's state-led economic growth model tends to create funding shortfalls between their fiscal expenditure and their limited sources of revenue, which drives local authorities to external and hidden sources for funds, or push them into debt.

On the other hand, a relatively lax regulatory framework, combined with blurred responsibilities between the central government and local authorities, provide a hotplate for the consequences of bad spending to fester.

"Much of the risk is found at the city and county level, where disclosure is more limited than at the provincial level," Moody's said. "The continued growth in contingent liabilities and the persistent funding gap underscore the difficulties faced by the central government in preventing the continued use of hidden debt."

Moody's estimates contingent liabilities of China's regional governments reached 60 trillion yuan, or 3.3 times their direct debt, as of the third quarter of 2018.

To pay for its debt, Zhenjiang's government " like almost every local authority in the country " relies on land leases to build high-rise homes, or to be turned into shopping centres, offices or factories. Up to 52.5per cent, or 14.9 billion yuan, of Zhenjiang's fiscal revenue in 2017 came from land sales, according to financial data provider WIND.

"Not only for Zhenjiang. For most of the Chinese cities, the sustainability of the LGFV's debts relies on land sales revenue," said Moody's analyst Chung.

The dependence on land sales pushed the city's land costs to records, in turn driving up the prices of completed homes.

"New property projects are sprouting up everywhere," said Wu Zhigang, a Sichuan native who makes a living now in Zhenjiang, driving taxis. "I thought home prices would fall because there is so much supply, and that had not happened in the last few years. Why are we building so many flats, and why are they so expensive?"

China Overseas Land and Investment bought a plot of land in Zhenjiang in May 2017 for 9,450 yuan per square metre, launching the completed homes eight months later for a record price of between 16,400 and 19,700 yuan per square metre. That priced the smallest, three-bedroom unit at Glory Mansion at close to 2 million yuan.

That is way beyond the affordability of Chen, even including the salary from his wife, who works as a teller in a state-owned bank. The couple have to support their newly born baby and their ageing parents too.

Still, Chen said he would hang on to his job with the Central Commission for Discipline Inspection (CCDI) of the Communist Party.

His job, which usually takes place in an innocent-looking apartment building, requires 100 per cent focus, he said.

Every movement " even if the detainee touches their nose " has to be recorded every five minutes. Permission is needed for toilet breaks, and the detainee is absolutely forbidden from external contact, and has to be on suicide watch and be constantly prepared for interrogation, Chen said.

"This is the best available option for me right now," he said.

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