China Plans Nationwide Audit Of Government Debt

July 29, 2013Chinaby EW News Desk Team


China has ordered an urgent nationwide audit of all government debt, underlining fears that heavy borrowing by local governments might pose a broader systemic threat to the world’s second largest economy.

In a one-line statement issued on Sunday, China’s National Audit Office said it had been instructed by the State Council, China’s cabinet, to carry out an examination of total government debt.

According to the official People’s Daily, citing unidentified sources, the urgent order for the audit was issued on Friday and work will begin this week.

In response to the 2008 financial crisis, local governments circumvented rules preventing them from taking on debt by setting up investment vehicles to borrow, funding a wave of infrastructure investment, including a national grid of high-speed train routes and the construction of thousands of roads and bridges.

Related: China To Spend $126 Billion On New Railway Projects

With many infrastructure projects providing low returns, there is a risk that some local governments will be unable to repay their borrowing, raising fears over bad loans in the Chinese banking system. Bank analysts say a big portion of new loans is already used to roll over bad loans.

According to the China Banking Regulatory Commission, local governments took up 80 percent of total bank lending in China at the end of 2010.

Related: Chinese Banks Rollover $482bn in Loans to Stave Off Massive Government Defaults

"A lot of the projects that were invested in will not have the kind of returns that they had initially estimated," said Dariusz Kowalczyk, senior economist with Credit Agricole-CIB in Hong Kong. "That coupled with slowing growth means that the finances of the local governments may not look too good."

According to the NAO’s last audit, published in 2011, local government debt was estimated at around 25 percent of China’s GDP at 10.7 trillion yuan ($1.7 trillion). However, some economists have estimated total local government debt in China to be $3 trillion and rising.

Last year, the audit office said that it had uncovered 531 billion yuan of irregularities in local government debts, which included "irregular credit guarantees", "irregular collateral" and "fraudulent and underpayment of registered capital".

China's debt problem is considered to be a serious potential drag on its economy unless steps are taken to rein it in. Earlier this month, the International Monetary Fund estimated that the combined obligations of both central and local governments stood at 45 percent of China’s GDP.

Related: China Hints At Growth Below 7%

Related: IMF Lowers China Growth Forecast to 7.75%, Issues Warning on Debt

With growth now slowing, fears about the ability of local governments to repay what they owe have become more pressing. Earlier this year, Zhang Ke, a senior Chinese auditor, told the Financial Times that local government debt was “out of control” and could spark a bigger financial crisis than the US housing market crash.

Related: China’s Local Government Debt Is “Out Of Control”, Warns Auditor

Related: China's Unruly Debt Woes: Michael Pettis


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