Govt debt audit to examine risks for sound economy

A forthcoming audit of overall government debt in China is expected to reveal the status quo of growing government debt and its potential risks amid the country's economic slowdown.

The planned nationwide audit follows a previous one conducted by the National Audit Office (NAO), which found liabilities of 3.85 trillion yuan (about 624 billion U.S. dollars) owed by 36 local governments, including Shanghai, Tianjin and Chongqing municipalities, by the end of 2012.

The debt amount was 12.94 percent higher compared with that at the end of 2010, when the combined debt of the 36 local governments accounted for 31.79 percent of the 10.7 trillion yuan in total local government debt at that time.

"When we talk about the local government debt problem, we should at least know what exactly the size of the debt is," said Zheng Chunrong, an economic professor at Shanghai University of Finance and Economics.

"How to restrain local governments if we have no clear idea of the debt amount?" Zheng said.

In June, the NAO also warned about the common financing of some local governments via trusts or fund companies and the high interest rates.

As the country is undergoing economic slowdown with declining revenues from land sales for local governments, a major source of the authorities' fiscal revenues, the new audit will examine overall actual risks in this sector, experts say.

A large part of local government debt has been spent on urban construction, and the worries and pressures of a county-level finance official can shed some light on the situation.

The deputy head of the finance bureau of a county in central China's Hubei Province said the county government would ask the bureau to raise funds for infrastructure projects.

But insufficient funds forced the bureau to take out loans from banks. Later, due to the long process and difficulties in being approved for loans from banks, the bureau resorted to raising private funds, said the local official who declined to be named.

The interest on the debts alone brought him great pressure. "Our repaying abilities are very poor, but the debts are increasing, just like a huge mountain. I fear there will be a breakdown some day," he said.

In a new zone under construction in Xi'an, capital of northwest China's Shaanxi Province, the construction of infrastructure facilities relies on bank loans.

The zone borrowed nearly 2 billion yuan from banks in 2012, with part of the loans taken out at a yearly interest rate of 12 percent. The short-term, high-interest loans brought a heavy financial burden to the local government.

Urban construction requires huge investments, and local governments often do not have the financial ability to support this on their own, said a top county finance official in northeast China. Bank loans and land development are two major channels for raising money.

"Local financing is a systematic problem caused by the GDP-oriented mindset of officials, poor fund management and other factors," according to Sun Lijian, deputy head of the School of Economics at Fudan University in Shanghai.

Meanwhile, Detroit's recent move to file bankruptcy sounded the alarm for China, according to some experts.

"In fact, local government debt in China has not yet caused a large-scale negative impact, but this does not mean no risks exist," said Sun.

"In fact, there are Chinese cities who have development similar to Detroit. Though they will not go bankrupt, they face the pains of development and transformation," added Sun.

Sun suggested that the key to the issue lies in preventing acts of random investment by local governments and empowering them with "hematogenic ability" through the development of competitive industries.

An Guojun, an associate researcher with the Chinese Academy of Social Sciences, said efforts should also be made to develop local government bonds and establish risk assessment and early warning systems for local government debt.

Meanwhile, the government debt problem has also raised concerns for the country's urbanization process.

Hu Dongsheng, an official with China Development Bank, said in April that China faces a fund gap of about 11.7 trillion yuan for construction related to urbanization in the next three years.

The enormous investment needed for urbanization has called for the introduction of more private and foreign capital, and the central and local governments should lower the threshold in this respect, said Hong Hao, a researcher at Central University of Finance and Economics in Beijing.

Private funds have become a major funding source for urbanization for townships in some regions, especially for projects such as drainage and sewage treatment, said a township head in Hubei Province.

The news of government debt audit has sparked concerns about rising debt levels. On Monday, the benchmark Shanghai Composite Index decreased 1.72 percent, or 34.54 points, while the Shenzhen Component Index lost 2.23 percent, or 174.83 points.

"The market needs overall and precise official data about local government debts. Otherwise, opaque information is unfavorable to stabilize market expectations," said Pan Xiangdong, chief economist with Galaxy Securities.