China's latest move to conduct a nationwide audit of government debts is a crucial step to collect fundamental data for its economic policymaking, according to experts.
The National Audit Office (NAO), the country's top auditing body, said Sunday that it would organize auditors across the country to conduct a comprehensive government debt audit.
The NAO did not provide any other details, nor a timetable, for the audit, but analysts believe that both central and local government debt will be covered.
Yang Zhiyong, a researcher at the Institute of Finance and Trade Economics under the Chinese Academy of Social Sciences (CASS), said the audit would provide fundamental data about government debt, which will serve as a basis for the country's policymaking.
Risks associated with mounting government debt have been a grave concern in China for years, as the risks may spill over into the entire financial system and affect economic growth.
An audit conducted in 2011 by the NAO found that local government debt totaled 10.7 trillion yuan (1.73 trillion U.S. dollars) at the end of 2010, representing more than 26 percent of the year's gross domestic product.
In early June this year, the NAO said that a follow-up audit found total debt of 3.85 trillion yuan owned by 36 local governments by the end of 2012, up 12.94 percent from 2010.
Liu Jiayi, auditor general with the NAO, said in an audit report in June that the country should improve local debt management to realize complete and dynamic supervision of local debts.
Luo Zhongwei, a researcher at the Institute of Industrial Economics under the CASS, also said the country must first gauge the size and structure of government debt and assess potential risks in order to make informed economic policies.
In local governments' pursuits of urbanization and economic growth, it is inevitable that government debt may further rise, Luo said.
"Local government debt itself is not fearful at all. The key is to make sure that there are no bubbles in it," Luo said.
However, experts, including Yang, saw China's local debt risks are generally controllable at present, while stressing the country must work to avoid potential risks in the future stemming from dropping revenue from land sales of local governments, a major source of government income.
Data from the Ministry of Land and Resources showed that land sales in 2012 dropped 14.6 percent from a year earlier to 2.69 trillion yuan due to the government's tightening efforts to rein in the property market.
Wang Xiaoguang, an expert with the Chinese Academy of Governance, said that the forthcoming audit will help the central government determine hidden problems in local government financing.
"Through the audit, the country will be able to spot and solve potential local debt problems, and thus safeguard stable and sustainable growth in the long term," Wang said.
Yang suggested the government establish a scientific and effective local government debt management mechanism and regulate local government debt issuance to avoid vicious debt expansion.
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