At least 102 Chinese cities faced difficulties in managing their debt-servicing costs last year, reining in China's ability to use fiscal stimulus to spur the economy's post-COVID recovery, according to a report by Rhodium Group.

The findings of the U.S. economics and policy research firm were based on the 2022 financial data of 205 cities and annual financial results of 2,892 local government financing vehicles (LGFVs), typically investment companies that raise money and build infrastructure projects on behalf of local governments.

Falling fiscal revenues amid China's property deleveraging campaign and COVID-19 curbs exacerbated the financial distress of local governments, which are traditional pump-primers of economic growth. Beijing has said defusing these debt risks is one of the government's major tasks this year.

Half of the 205 cities surveyed made interest payments accounting for 10% or more of their fiscal resources, a threshold suggesting difficulty in managing debt-servicing costs, according to Rhodium Group. That ratio was up from one-third in its February survey of 318 cities using 2021 annual data.

The interest burdens of the northwestern city of Lanzhou and the southwestern city of Guilin outpaced their fiscal capacity last year, the report showed.

"The current weakness of localities' finances prevents Beijing from utilising fiscal policy to support the economy," according to the report.

"In fact, this is the primary reason that there has been no meaningful fiscal support for China's recovery this year."

Official data on Wednesday showed factory activity shrank faster than expected in May, heaping pressure on policymakers to shore up a patchy economic recovery.

With debt obligations mounting, some local governments are pushing banks to extend maturities and cut interest rates, sources told Reuters earlier this year. LGFVs have 5.5 trillion yuan ($790 billion) worth of onshore bonds coming due this year, the highest since 2021, according to Fitch.

As investors become more concerned about municipal debt risks following LGFV debt repayment stresses seen in provinces such as Guizhou and Yunnan, Goldman Sachs analysts said in a note on Wednesday that policymakers will try to prevent bond defaults this year amid weak sentiment and uneven economic recovery.

"But we see risks on the rise especially for the less developed inland regions," the analysts said. (Reporting by Ellen Zhang and Ryan Woo; Editing by Kim Coghill)