Chinese municipal debt runs rampant

LOCAL governments across China have borrowed billions of dollars to build bridges, apartments and shopping malls, leaving many insolvent and endangering the country’s financial system, analysts warn.

While the central government in Beijing is in good financial shape – it has a relatively small budget deficit, a huge trade surplus and the world’s largest foreign exchange reserves – it is a different picture outside the capital.

By late 2010 local governments had borrowed 10.7 trillion yuan (R13.7 trillion), according to official data, though Moody’s Investors Service believes the figure is underestimated by 3.5 trillion yuan.

Several provinces have since published reports showing their debt-to-gross domestic product (GDP) ratio was higher than the national figure.

Rating agency Moody’s believes that 8 percent to 10 percent of loans made by Chinese banks will never be recouped.

“Debt across the board is rising very quickly”, weakening the banking system, said Michael Pettis, a specialist in Chinese financial markets at Peking University. “But any attempts to slow its growth results in a rapid reduction of investment and growth.”

China’s total public debt – including the central and local governments – stands at 68 percent of GDP, well below Italy’s ratio of 120 percent or Japan’s at more than 200 percent.

But at local level the key concern is repayment. To meet their commitments local governments are generating income from land sales, which is fuelling unrest as residents complain that land is being unlawfully seized.

Such corruption allegations have culminated in protests, such as the one in Wukan last month, where villagers staged a revolt against authorities they said had been stealing their land for years.

Another source of income is from infrastructure projects, many of which are not profitable or legal. Investment in highways, shopping malls and apartment buildings has been a key driver of the economy in recent years, especially since the 2008 global crisis.

“Over the past couple of years, more than half of Chinese GDP has been generated by investment in fixed assets” such as factories and roads, said Patrick Chovanec, an economics professor at Beijing’s Tsinghua University.

There were “things that make economic sense but are not commercially viable” such as roads or hospitals, which should have been funded by taxpayer money, he said.

An audit of local government debt in 2010 found that 530.9 billion yuan had been misused, the National Audit Office said last week.

If the loans cannot be repaid, the banks will have to be bailed out by Beijing, meaning the central bank will have to print money, which will in turn create inflation.

A recent downturn in China’s housing market will also weigh on the finances of cities and provinces that had planned to pay off debt by selling land at high prices.

With apartment prices starting to fall, development plots are struggling to find buyers: in 2011, more than 900 sites offered to developers went unsold, compared with only 280 in 2010, the Beijing News said on Friday.

Such sales provide a major share of municipalities’ incomes. In Shanghai the average price paid per square metre fell 41 percent last year.

As an experiment, the rich coastal provinces of Guangdong and Zhejiang, and the cities of Shanghai and Shenzhen, were authorised to issue their own bonds in October for the first time in 17 years. But the securities have low yields and have so far mainly been sold to state commercial banks.

Nonetheless, World Bank senior vice-president Lin Yifu said last month that China was not at risk of a debt crisis like the one engulfing Europe. “The government has much less debt than many developed countries, so any concern about a debt crisis in China is groundless,” he said. – SAPA-AFP