Do not capitalize on China's local government debt

14:20, July 22, 2011      

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China's local governments at the provincial, municipal and county levels had amassed more than 10.7 trillion yuan in debt by the end of last year, according to a report recently released by the National Audit Office. The huge debt has caused great concern among reporters and businesspeople both foreign and domestic about a possible default and the repayment capability of China's local government.

Industry insiders believe that China's local government debt is still under control and will not create an adverse chain reaction. The central government is increasing regulatory efforts to curb the disorderly growth in local government debt.

China's local government debt burden exaggerated

The National Audit Office's report has generated a heated discussion among domestic and overseas media about whether China's local government debt is massive and whether it will produce adverse effects on the Chinese economy. Certain international credit rating agencies failed to provide objective and fair ratings. As a result, many foreign investment institutions took the chance to hint at a possible economic downturn in China and started using local government debt as a new tool to make negative predictions about China's economy.

Moody's, one of the three leading international rating agencies, recently said in a report that China's local government debt burden may be 3.5 trillion yuan larger than auditors estimated and warned that the credit outlook for Chinese lenders could turn negative. Shortly afterward, the share prices of major Hong Kong-listed Chinese banks dropped sharply.

Sun Mingchun, chief China economist for Daiwa Securities, said that Moody's used inaccurate data and inexact calculations to produce the report on China's local government debt. Independent economist Andy Xie believes that there will be more negative reports about the country's debt burden from Moody's because they serve the interests of both the rating agency itself and international investors.

Zuo Xiaolei, chief economist at China Galaxy Securities, said frankly that certain influential rating agencies have formed a community of interests — if not a conspiracy — with short-sellers and are trying to gain benefits by issuing negative ratings, making negative predications about China's economy and exaggerating China's local government debt burden. Their purpose is to use the money of the Chinese people to pay off the debt of crisis makers.

Local debt risk controllable

"Foreign media indeed have exaggerated China's local debt risk," Zhou Li, a professor from the School of Economics and Management under Tsinghua University, said during an interview. Zhou also said that although China's local debt has currently reached 10.7 trillion yuan and there are some problems in the local borrowing system, this would not influence the solvency and normal operation of local governments.

Guo Tianyong, director of the China Banking Research Center under the Central University of Finance and Economics, said that the primary cause of the rapid expansion of local debt is that the reform of the tax system has caused the asymmetric distribution of administrative and financial powers between local governments. This gradually caused a situation in which administrative powers gathered in hands of governments at the higher level, while financial powers were transferred to governments at the lower level.
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