Debt is a four-letter word which can drive policy wonks crazy when they decipher the reams of data churned out by China’s National Bureau of Statistics.

On Thursday, Finance Minister Liu Kun tiptoed through that fiscal minefield at a media conference on the sidelines of the National People’s Congress in Beijing.

He warned that local governments will face “budgetary pressure” in 2019 amid an economy showing signs of stress and planned tax cuts by Beijing worth 2 trillion yuan ($298 billion).

“Considering the downward pressure on the economy and the upcoming policy of larger tax and fee cuts, some regions will still face relatively big budgetary pressure this year,” Liu said.

His comments came just 48 hours after Premier Li Keqiang announced a higher budget deficit and a lower GDP growth forecast of between 6% and 6.5% for 2019.

Outlining the “tough challenges” ahead, Li warned the 2,975 delegates gathered in the Great Hall of the People that China must be prepared for “a graver and a more complicated environment” in the next 12 months.

But while his GDP growth target dropped to levels not seen for 30 years, it was not a seismic shock. After all, the economy is starting to evolve and mature as it sheds its emerging-market glitter.

“The arrangement on the budget deficit ratio has fully considered factors, including fiscal revenue and local government special bonds, and leaves more policy room for future macro adjustments,” Liu told the media, adding that the Ministry of Finance’s proactive policy will involve limited stimulus measures.

At the same time, Beijing has become concerned about the state of provincial debt, which topped 18.39 trillion yuan (US$2.74 trillion) by the end of last year, according to official data.

Although that was below the ceiling set by President Xi Jinping’s administration of 21 trillion yuan, lurking beneath the surface is “off-balance-sheet borrowing.”

Liu alluded to the problem when he confirmed that local governments will be allowed to issue 2.15 trillion yuan ($320.55 billion) in special purpose bonds in 2019, which is a 59% increase from last year.

“China is very serious about hidden debts. I have to admit that there are still some local governments borrowing through financing platforms, which is illegal as it is beyond their statutory [borrowing] limit,” he said. “We are taking strict measures and won’t allow any new cases to emerge.”

Complexity

To illustrate the complexity of the situation, the Shanghai University of Finance and Economics released a survey in December on the assets and liabilities of 31 provincial-level regions.

The results were startling.

High-tech manufacturing hub Guangdong topped the poll when it came to transparency. The South China province scored 69.38 after supplying nearly 70% of the information requested by researchers from the university’s Public Policy Research Center.

Least transparent was Jiangxi, which is situated in the southeast of the country, with a rating of just 26.98, while the average score hovered around 53%.

“[But] the general level of transparency in China’s local governments remains poor,” the study concluded.

Still, there were broader implications.

One aspect that stood out was the limited information on “off-balance sheet” local government debt.

During the past three years, Xi’s government has made this a priority with the People’s Bank of China warning of the dangers it poses to the economy.

‘Credit risks’

In September, economist Liu Shijin, a member of the Monetary Policy Committee of the PBOC, pointed out that excessive investment in infrastructure and property projects was not the long-term answer to China’s growth dilemma.

“Although investment in building roads, railways and housing can play a role in preventing a precipitous decline in growth, its potential to drive economic expansion over the long run has waned,” Liu said, adding that this would only exacerbate the country’s deleveraging problems.

A month later, S&P Global, one of the “Big Three”credit rating agencies, rolled out a damning report on the scale of the “credit risks” facing Beijing.

“The extent of off-balance-sheet borrowing among local governments isn’t known, but it could be as high as 40 trillion renminbi ($5.78 trillion),” the study revealed. “That’s a debt iceberg with titanic credit risks.”

Most of the “hidden debt” still festers in local government financing vehicles, or LGFVs, which were set-up by state-owned companies to raise funds for infrastructure and development programs.

Usually, this sort of “off-balance-sheet borrowing” is done outside the normal channels of central government, which the Ministry of Finance is determined to crack down on.

For Liu’s team, that will mean tiptoeing through the murky world of “shadow banking” as they chase that elusive four-letter word known as debt.