(Ecns.cn)--China's more than 10 trillon yuan in local government debt is under control, although some regions and industries will see huge pressure to repay, according to a report in the People's Daily on Friday.
On June 27 Liu Jiayi, the auditor-general of the National Audit Office (NAO), said in a report submitted to China's top legislature that the country's local government debt totaled 10.72 trillion yuan ($1.66 trillion) by the end of 2010. This was the first time for the country to publicly reveal the size of the debt.
The overflow of local government debt has long worried industry experts, who said that it may pose systemic financial risks or lead to a hard landing for China's economy.
Among the 10.72 trillion yuan, 6.7 trillion will be repaid by local governments, accounting for 62.62 percent of the total number, according to the NAO.
About 2.3 trillion yuan is guaranteed by local governments, or 21.80 percent. The amount of other related debts requiring local government bailouts amounts to 1.7 trillion yuan, or 15.58 percent.
According to the People's Daily report, the risk posed by local government debt is under control because the local government debt ratio is 52.25 percent, much lower than the ceiling set by Western nations.
However, some regions and industries will encounter huge pressure to repay, the report said. The government debt ratio of about 78 cities and 99 counties had reached 100 percent by the end of 2010.
Jia Kang, director of the Institute of Fiscal Science Research under the Ministry of Finance, said the overall local government debt is still under the safety line, but some regions have improperly managed their debt.
The prospective risks posed by those debts were concentrated in poorer cities and counties, according to industry experts. The problem may deteriorate if economic growth in those regions slows.
When did the problem begin?
The large amount of local government debt accumulated over many years because of unsound local finance systems, the People's Daily said.
It can be traced back to 1979, when only eight counties were in debt. By the end of 1996, almost all provincial governments, 90.05 percent of municipal governments and 86.54 percent of county governments owed money. Only 54 county governments out of more than 2,800 in the country had zero debt by the end of 2010, according to the NAO.
About 3.2 trillion yuan, or 29.85 percent of local debts, was borrowed before 2008, and 2.3 trillion yuan in debt was used for subsequent construction or repayment on principal and interests owed before 2008.
In addition, the balance of local government debt rose dramatically in 1998 and 2009 because of macro economic policies by the government to cope with financial crisis.
Repaying the debts
Local governments should repay their debts by reducing expenditures and promoting the reform of their fiscal and tax systems, experts suggested.
Qu Hongbin, co-head of Asian economics research for HSBC, said local governments should increase the transparency of their debts. About 8.5 trillion yuan, or 79.01 percent of local debts were borrowed from banks, according to the NAO. In order to reduce the risk posed to banks, Qu also proposed that local governments should raise money by issuing long-term bonds to reschedule their bank loans.
Local governments should try to repay the most urgent debts through the disposal of their treasury and cutting expenditures, said Tang Min, vice chairman of the China Social Entrepreneur Foundation. Tang also suggested that local governments should sell assets to repay debts.
However, Jia insisted that only through reform of their fiscal and tax systems could governments solve their debt problems thoroughly.
