China's local debt risk is still in safe range

10:55, July 25, 2011      

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China's National Audit Office recently released local debt audit results that fully reveal the liability situation of various local governments above the county level since 1979, involving a total of nearly 1.9 million in specific debt. This is the most authoritative and comprehensive information on the actual liability situation of China's local governments.

The risk of China's local debt has been a topic of concern for various parties. As a researcher, my overall judgment is that although China encountered many problematic issues during the process of pursuing a sound and rapid development through reform and opening up and indeed needs to pay more attention to prevent risks and conciliate conflicts in the period of golden development and the period of major challenges, if we consider the situation from the particular perspective of local government debt or public sector debt ratio, we will find that the audit results provide us a basis to form the following basic judgment: the total debt of China's public sectors, with debt ratio as a key index, is in the safe range in general.

European Union members stressed in the "Treaty of Maastricht" that the debt ratio of public sectors should not exceed 60 percent. Although this security line was proven to have failed under the impact of the global financial crisis, it is still a main reference standard of judging the current China debt risk.

According to audit findings, China's total amount of the three kinds of local governmental debts — direct debt that local governments were liable to pay, potential debt that local governments are liable to guarantee and debt that may need local government aid — was 10.7 trillion yuan by the end of 2010. Of them, the latter two, accounting for 37.4 percent, will not completely become actual debts.

Even if they are all actual debts, the total amount of 10.7 trillion yuan only accounted for a little less than 27 percent of China's GDP in 2011. If the public departmental debts of China showed on paper, accounting for about 20 percent of the GDP; the financial bonds issued by China's policy-based financial institutions, accounting for about 6 percent of the GDP, and others are all added in, the total amount of China's public governmental debts will account for between 50 percent and 55 percent of the GDP.

It is still in a safe range where risks can be controlled. In addition, all these previously unknown debts were shown to the public, more departments have offered effective cooperation and strengthened their supervision of the debts to control risks, and therefore, the proportion of the public departmental debts to the GDP will no doubt be reduced in the future.

It should be emphasized that although the audit results have proven that China's local government debt burden is still under control, two major problems have been exposed in this process. First, the transparency of local government debt was obviously low in the past. A large amount of "hidden" debt was formed in accordance with unwritten rules, which was highly risky. Second, the total debt burden of local governments is still in safe zone, but certain regions are faced with noticeable debt risks.

If the hidden problems in certain regions with high debt ratios and certain high-risk projects erupt, there will be a high social cost, including heavy direct economic losses, serious decline of public trust in government agencies and unnecessary waste of the time and energy of decision-makers. With a full picture of local government debt, China should take targeted measures to improve the fiscal transparency of local governments, create a sound emergency response mechanism and strengthen coordination and risk prevention in order to achieve sustainable development.

Certain overseas news agencies have created sensational and baseless speculation about China's local government debt and claimed that China's economy would soon collapse. With a full picture of local government debt, China is able to eliminate the possibility of a nationwide debt crisis and to solve regional debt problems through various means with the help of multiple "firewalls," including sufficient bank reserves for bad debts, disposable funds and quickly realizable assets of local governments as well as the rich and diversified economic resources that the central government has accumulated thanks to the country's growing comprehensive national strength.

By Jia Kang, the director of the Research Institute for Fiscal Science under the Ministry of Finance, translated by People's Daily Online

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