BOR­ROW­ING BOOM

Lo­cal debt hits $3 tril­lion, but is con­trol­lable

China Daily (Hong Kong) - - FRONT PAGE - By ZHENG YANGPENG zhengyang­peng@ chi­nadaily.com.cn

China’s lo­cal gov­ern­ment debt and con­tin­gent li­a­bil­i­ties bal­looned to 17.89 tril­lion yuan ($ 2.93 tril­lion) as of the end of June, ac­cord­ing to the long-awaited re­sults of an au­dit.

The fig­ure, re­leased by the Na­tional Au­dit Of­fice on its web­site on Mon­day, im­plied a 67 per­cent rise from a pre­vi­ous es­ti­mate of 10.7 tril­lion yuan at the end of 2010.

Con­cerns have grown over the amount of debt and its po­ten­tial im­pact on the world’s sec­ond-largest econ­omy.

Bei­jing em­barked on the au­dit in July. The of­fi­cial process, in­volv­ing 54,400 au­di­tors across the na­tion, ex­am­ined li­a­bil­i­ties at five lev­els of gov­ern­ment: cen­tral, pro­vin­cial, pre­fec­tural, county and town­ship.

The 2010 au­dit only cov­ered pro­vin­cial, pre­fec­tural and county gov­ern­ment debt.

The re­sult of the au­dit showed that lo­cal gov­ern­ments’ di­rect debt — debt that will be re­paid by gov­ern­ment fis­cal rev­enue — to­taled 10.88 tril­lion yuan.

Con­tin­gent debt, which is de­fined as debt that will be re­paid by re­turn on projects, reached 7 tril­lion yuan.

The con­tin­gent debt tally in­cludes debt for which lo­cal gov­ern­ments is­sued of­fi­cial guar­an­tees (2.67 tril­lion yuan) and debt with im­plicit gov­ern­ment guar­an­tees (4.34 tril­lion yuan).

Com­bined with another 9.81 tril­lion yuan in di­rect cen­tral gov­ern­ment debt, 0.23 tril­lion yuan in cen­tral gov­ern­ment backed debt and 2.3 tril­lion yuan in debt with im­plicit cen­tral gov­ern­ment guar­an­tee, China’s to­tal gov­ern­ment debt as of June 2013 was 30.27 tril­lion yuan.

The NAO said to­tal debt by the end of 2012 was 113.41 per­cent of gov­ern­ment fis­cal rev­enue, while a 90 to 150 per­cent ra­tio is con­sid­ered safe in­ter­na­tion­ally.

“China’s gov­ern­ment debt risks are un­der con­trol in gen­eral, but there are po­ten­tial risks in some places,” the of­fice said.

“We be­lieve the mar­kets and the Chi­nese gov­ern­ment should be alarmed by the rapidly ris­ing lever­age, but we do not be­lieve China is on the brink of a debt cri­sis, es­pe­cially if the new lead­ers can take de­ci­sive mea­sures to ar­rest its ris­ing lever­age,” Lu Ting, an econ­o­mist at Bank of Amer­ica Mer­rill Lynch in Hong Kong, said in a note Mon­day.

Lu cited the cen­tral gov­ern­ment’s “very low” ra­tio of debt to GDP, which stands at 21 per­cent.

As al­most all gov­ern­ment debt is de­nom­i­nated in China’s own cur­rency and held do­mes­ti­cally, “the Peo­ple’s Bank of China can pre­vent a pub­lic debt cri­sis with its un­lim­ited ca­pa­bil­ity for liq­uid­ity sup­ply”, Lu said.

Lu added that China is pro­tected by na­tional sav­ings that in­clude $3.5 tril­lion in for­eign ex­change re­serves. Fur­ther, its cen­tral and lo­cal gov­ern­ments have solid as­sets, and the coun­try still en­joys high eco­nomic and fis­cal rev­enue growth.

Song Li, a lo­cal gov­ern­ment re­searcher with the Academy of Macroe­co­nomic Re­search un­der the Na­tional De­vel­op­ment and Re­form Com­mis­sion, said the growth of the debt is in line with the de­vel­op­ment of the coun­try’s in­fra­struc­ture and other con­struc­tion.

“China’s ur­ban­iza­tion re­quires huge amounts of fi­nanc­ing in in­fra­struc­ture and other ar­eas. So it is nat­u­ral to see the rapid rise of debt. Un­like debts in Western coun­tries, which are con­sump­tionori­ented, most of China’s debts were trans­formed into prop­erty and could yield sta­ble re­turns,” he said.

The NAO’s re­port showed that of all the lo­cal gov­ern­ment debts, the largest por­tion, or 32.4 per­cent, was in­vested in mu­nic­i­pal con­struc­tion. The sec­ond-largest por­tion, or 22.9 per­cent, was in­vested in trans­porta­tion. Govt­backed debt The re­sult also re­vealed that China’s pre­fec­tural level gov­ern­ments had raised the largest debts, or 27 per­cent of the lo­cal debt. County-level gov­ern­ments ac­counted for the sec­ond-largest amount, or 22.1 per­cent.

There are also risks. The re­sult re­vealed that two prov­inces, 31 pre­fec­tures and 29 coun­ties had re­paid more than 20 per­cent of their debts by rais­ing new debt in 2012.

Also, 37.23 per­cent of debt re­pay­ment in­volved land sale rev­enue, a level that was deemed too high.

Many ex­perts have sug­gested China should boost its mu­nic­i­pal bond mar­ket to give lo­cal gov­ern­ments greater scope for fi­nanc­ing, a method that’s re­garded more trans­par­ent and bet­ter reg­u­lated.

At present, only 10.3 per­cent of lo­cal gov­ern­ment debt in­volves bond is­sues, the NAO said.

Qi Bin, di­rec­tor of the re­search center un­der the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion, said mu­nic­i­pal bonds and as­set se­cu­ri­ti­za­tion will be the two ma­jor stan­dard meth­ods for fu­ture bor­row­ing.

A big share of the debt stems from spend­ing on new air­ports and other pub­lic works as part of the stim­u­lus pack­age that helped China re­bound quickly from the 2008 fi­nan­cial cri­sis.

While Western gov­ern­ments bor­rowed di­rectly to pay for their stim­u­lus pro­grams, China’s debt was con­cealed tem­po­rar­ily on the books of State banks.

An­a­lysts have warned that the rapid in­crease in lend­ing could lead to a rise in un­paid loans.

Lo­cal gov­ern­ments also bor­row to pay for schools and other so­cial pro­grams that are man­dated — but not paid for — by the cen­tral gov­ern­ment.

The to­tal debt bur­den was ob­scured be­cause lo­cal gov­ern­ments cre­ated sep­a­rate in­vest­ment agen­cies to pay for the con­struc­tion of high­ways and other in­fra­struc­ture. Some have run into trou­ble rais­ing rev­enues to re­pay lenders.

Mon­day’s au­dit re­port also cited prob­lems in­clud­ing high debts for lo­cal in­dus­try, heavy re­liance by lo­cal lead­ers on land sales to raise rev­enue and im­proper ac­tiv­i­ties sur­round­ing some gov­ern­ment debt.

Au­di­tors found some 13.5 bil­lion yuan that had been im­prop­erly in­vested in stocks and real es­tate or spent on unau­tho­rized con­struc­tion, the re­port said. It said 69 peo­ple were im­pli­cated but gave no other de­tails. Agen­cies con­trib­uted to this story.

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