China’s most indebted local governments have seized on a novel method to relieve some of their burdens – turning vast stores of data into credits on their balance sheets. The unusual approach, tested in certain localities and covering a small share of their total obligations, raises legality and sustainability questions even as it presents an enticing escape route.
Beijing has stepped up its supervision of local governments over the past two years, as a prolonged downturn in the property market and enormous pandemic control expenditures have weighed down regional finances.
Analysts said with land sales no longer providing the revenue they once did, intangible assets like data might help some local governments inject life into their ledgers. But assets of this type are generally more difficult to assess when it comes to financing.
Last year, China approved an updated set of accounting rules that allows companies to include data resources as either “intangible assets” or “inventories” in their financial statements.
China’s Ministry of Finance said that corporate data could be classified as intangible assets provided they meet certain accounting standards, and data held for sale in daily business activities could be included in inventory.
Intangible assets, which include software, databases and intellectual property, are set to occupy a growing share of Chinese companies’ balance sheets.
The size of China’s digital economy exceeded 50 trillion yuan (US$6.9 trillion) in 2022, accounting for 41.5 per cent of the country’s gross domestic product, the finance ministry said.
Since the beginning of this year, at least 77 entities in China have registered their data as assets, including 19 local government financing vehicles (LGFVs), 25 state-owned enterprises and 33 private companies, according to estimates from China Merchant Securities based on public disclosures.
LGFVs are hybrid entities that are both public and corporate and were created to skirt restrictions on local government borrowing. They have proliferated since the global financial crisis in 2008.
Five of the LGFVs are from China’s Jiangsu province, and four are from Shandong province. For these LGFVs, data associated with transport – including city traffic and car park resources – were most commonly registered as intangible assets, China Merchant Securities said in a note on May 2. Other types of data such as heating pipe network databases and public service data networks have also been categorised in this way.
Two of these LGFVs, one each from Tianjin and Sichuan, that have registered data as assets have succeeded in obtaining financing. But the loan size was relatively small compared to their overall outstanding debt, the securities firm noted – 15 million yuan versus arrears of over 54 billion yuan as of June 2023.
Beijing has encouraged local governments to transform their LGFVs – which have traditionally focused on infrastructure spending – into commercial entities, though outcomes have been mixed so far.
“[Funds] obtained from banks would be used for operations, research and development in technology,” an unnamed official of Tianjin Lingang Holdings was quoted as saying in February by Tianjin Daily. “Through our digital assets we’ve obtained credit from banks. It has expanded our cash flow and helped promote further inclusion of our data as assets.”
Legal issues surrounding the data – such as ownership, evaluation and the quality of what can be counted as assets – remain unclear, according to Dagong Global Credit Rating.
“For enterprises with abundant data resources, adding data as assets to balance sheets can better reflect their true financial situation,” the Chinese rating agency said in a note last month.
“However, taking into account factors such as data ownership, timeliness and value variability, it is still difficult to promote their entry.”
