China's local governments in $1.6 trillion debt

09:38, June 28, 2011      

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The top government auditor told the National People's Congress on Monday that all Chinese local governments are now in 10.7 trillion yuan (US$1.65trillion) of debt -- 80 percent indebted to China's banks, posing a massive peril to the banking system.

Liu Jiayi, the auditor-general of the National Audit Office, urged central and local governments to take effective measures – possibly through issuing local government bonds – to fix the loophole and prevent a default from happening in the coming years.
Liu said that only 54 county governments out of nearly 2,800 in the country had zero debt. And, most of the debts were incurred during the government's huge pump-priming effort in 2009 and 2010 to stimulate a suddenly sagging economy in the aftermath of the global financial crisis.

Analysts say that local governments will struggle to repay their loans.

"The property sector is feeling the pinch from government policy tightening, and it takes time for government-invested projects to generate returns," Hua Zhongwei, an analyst with Huachuang Securities in Beijing, said.

To tackle the problem, the audit office said financing vehicles set up by local governments would be firmly barred from incurring new debt, while local governments would be allowed to sell bonds, but only with approval from the central government in Beijing.

Releasing its first audit of local government debt at 10.7 trillion yuan, which amounts to 27 percent of the economy, Liu Jiayi aid local governments' financing vehicles would be cleaned up. The report said nearly half the debt - 4.97 trillion yuan - was made through financing vehicles. Local governments had set up 6,576 financing vehicles by the end of 2010.

Bank loans were the source of 80 percent of debt, topping 8.5 trillion yuan as of December 31 last year.

"Local government financial vehicles are numerous, burdened with big-scale of debt and some are ill-managed with weak capacity to make profits," Liu said.

Premier Wen Jiabao ordered the first audit of local government debt in March, amid concerns that China's 4 trillion yuan stimulus measures to guide economic growth through the global financial crisis could lead to a rebound of bad loans for banks, the main source of local government finance.

More than 40,000 auditors looked at the books of 31 provincial-level governments on the mainland and 2,779 county governments.

Among the debts, local governments had injected more than 1.37 trillion yuan into education, health care and other fields related to people's well-being as of the end of last year. More than 401.6 billion yuan had been used to promote energy saving and emissions reduction, and ecological enhancement and industrial development.

More than 6.96 trillion yuan had been invested in infrastructure, including transport development, purchasing and reservation of land, as well as energy development.

Qu Hongbin, HSBC's chief economist in China, said that although the size of the debt was still manageable, authorities needed to take immediate action to restructure these debts to mitigate the risk of defaults.

"Without real action going toward a restructuring of these debts, banks would face a real risk of defaulting in the coming years," he said. "We think allowing local governments to issue bonds to be the most feasible option in the near term."

By People's Daily Online
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