Auditor: local government debts pose economy risk

09:12, June 25, 2010      

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China's annual audit shows the country's recession-fighting spending spree has led some local governments to run up debts to levels that could pose a threat to the economy.

The National Audit Office,in a report to the National People's Congress Standing Committee, the legislature, says that it found local debts totaled 2.79 trillion yuan (US$409.7 billion) in the 18 provinces investigated in the office's annual audit.

Of that total, 1.04 trillion yuan (US$157 billion) or nearly 60 percent was generated in 2009.

"The pressure from some government debt burdens is quite heavy, and poses a definite risk," Liu Jiayi, director of the audit office, said in the report to the Standing Committee of China's national legislature.

"New government debt must be strictly controlled to prevent financial risks from evolving into fiscal risks," Liu said.

Chinese banks escaped most of the mortgage-related turmoil that has battered Western financial institutions and despite its heavy stimulus spending, China has a relatively low level of debt relative to the size of the economy.

It also has the world's largest foreign exchange reserves –more than US$2.4 trillion U.S. dollars.

The reports were not suggesting any risk of a European-style default on national debts. But the audit report's disclosures follow other top-level warnings over rising risks from borrowing by local government-created investment companies set up to help finance local stimulus projects.

The World Bank warned in a March report that the growing debts of the financing platforms were among various "macro economic risks" stemming from the stimulus.

Earlier this month, the State Council, the cabinet, ordered local governments to improve management of such investment vehicles and told banks to limit lending to them.

The State Council also directed banks to control lending to these agencies by targeting loans at specific projects and monitoring how the credit is used.

A recent report by the central bank focused on worries over local borrowing in Tianjin, a city near Beijing, where loans to local government entities doubled last year to 432.5 billion yuan (US$63.5 billion)

Nationwide, loans to local government investment companies rose 70 percent over the year before to 7.4 trillion yuan (US$1.1 trillion).

Apart from the risks to lenders if the loans are not repaid, Chinese law requires that local governments have balanced budgets.

By People's Daily Online / Agencies


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