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China unlikely to undergo local govt debt crisis (2)

(People's Daily Online)

08:13, June 13, 2012

The debt risk of local governments is controllable

China's government debts have not only a healthy index but also strong debt paying ability and so the scale and risk of debts is controllable, said Bai Jingming, deputy director of the Research Institute for Fiscal Science of the Ministry of Finance of China.

Bai said that some advanced countries did not yet wipe off the old debts but the newly increased debts have arrived. The level of debts is rising. The data show that the overall deficit in 27 European Union countries accounts for 4.5 percent of their GDP in 2011, a down from 6.5 percent in 2010, but is still higher than 3 percent, the critical value. Although the deficit rate in the European Union countries is somewhat decreased, the overall debts are still high, accounting for 80 percent of the GDP in 2011 and 82 percent in 2012, which is far beyond 60 percent, the limit value.

Besides the European Union, the debt situation in other advanced countries including Japan and the United States is equally bleak. Someone had forecasted that the Japan's national debts to its GDP ratio will climb to 239 percent by the end of 2012.

However, the situation in China is completely different and both its debts rate and deficit rate showed a downward trend. The total scale of local government debts of China is about 11 trillion yuan in 2010 and the newly increased debts only reach 300 million yuan in 2011. The GDP of China increased by about 9 percent in 2011 while the local government debts basically remain unchanged compared with the last year, which means that the proportion of local government debts to the GDP actually declined to nearly 23 percent from 27 percent in 2010.

"The debt risk, in the final analysis, involves whether the debts can be repaid timely and the debt paying ability of the governments depends on the financial revenue, namely issuing new debts to repay old debts, which also needs support from the increment of the government revenue," said Bai.

According to Bai, China's public financial solvency is strong and its debts are controllable, which mainly thanks to the following three factors:

Firstly, the stable and rapid growth of Chinese economy guaranteed the rapid growth of fiscal revenue and provided strong support for the financial resources of the state.

Secondly, using proper and proactive fiscal policies including tax reduction measure to stimulate investment and consumption and drive economic development forward, rather than the pure expansion of deficit to stimulate economic growth. Similarly, it not only lifted the worries of the public but also stimulated investment and consumption to pay close attention to the field of people's livelihood and improve the level of social security and public service.

Thirdly, it is because of the strengthened management of financial expenditure. In recent years, China constantly deepens its management of financial expenditure and strengthens the public budgets, which effectively constrained unreasonable expenditure and laid the institutional foundation for the prevention of the risk of government debts.

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