Local governments' spending sprees create concern

A new wave of massive spending plans rolled out in recent months by local governments to boost the flagging economy has sparked concerns over wasteful investments and potential local government debt risks.

Changsha, capital city of central China's Hunan Province, unveiled its ambitious investment plan late last month, which features a total investment of 829.2 billion yuan (130.9 billion U.S. dollars) in 195 projects ranging from constructing an airport and exhibition halls to renovating run-down towns.

Before Changsha rolled out its plans, Nanjing, capital of east China's Jiangsu Province, set out favorable policies designed to spur its economy, including stepping up investment efforts.

These plans came as China's central government has shifted its focus to steadying growth amid the slowing economy, which dipped to a three-year low of 7.6 percent in the second quarter, and put the public on alert for possible consequences.

"Exhibition centers that have been built in some cities are seldom used," netizen "Robbin-Morgan" commented on the news portal Sina. "They will be a waste."

"yneszhdgd" also voiced his concerns on the blog, writing, "Inadequate government funds could hardly cover so many projects. The massive investment plan means the beginning of half-done projects."

Others have warned of industrial overcapacity as investment projects in different regions may overlap.

According to He Zhicheng, an economist with the Agricultural Bank of China, 21 of the 24 major industrial sectors have faced serious over-production problems.

"Steel is now even cheaper than cabbage," he said.

Meanwhile, access to funding has been another major problem.

Local governments have seen revenues from land sales tumble due to government policies to curb the sector, and banks, one of the major financing sources for local governments, remain laden with bad loans leftover from previous stimulus plans, making credit ever harder to obtain.

Statistics from the National Audit Office showed that local government debts had amounted to 10.7 trillion yuan by the end of 2010, exceeding that year's fiscal revenue.

Given the scale of investment plans, the pile-up of local government debts was inevitable.

Zhou Lianjun, deputy head of the financing office of the Changsha municipal government, said the city's financial support will be provided by both banks and local governments, and there is "no need to overreact to debt worries."

Liu Shangxi, deputy chief of the Research Institute for Fiscal Science under the Ministry of Finance, said the investment and debt scales were not something to be dreaded, and the key lies in the transparency that would allow the public to supervise and contain the debt within a controllable range.

"The public has the right to know the sources and destinations of funding in order to prevent corruption," he said.