Chinese local governments owe Rmb10,700bn ($1,650bn) in debt, according to the first national audit of regional finances published by Beijing.
That amount is equivalent to about 27 per cent of China’s economy and easily outstrips central government’s officially declared debt balance of less than 20 per cent of GDP.
The new audit provides the most authoritative estimate to date of provincial and city governments’ explicit debts and suggests the problem, although large, is manageable.
“I don’t think government is super-scared this problem is unmanageably large and the amount of loans outstanding is going to cause big problems for the economy,” said Paul Cavey, head of China economics at Macquarie Securities. “The main concern for the government is to make sure the scale of lending doesn’t continue to grow.”
Local governments have accumulated an unprecedented mountain of debt in the wake of the 2008 financial crisis after Beijing opened credit floodgates, backing state-owned banks to lend to state-backed infrastructure projects.
With Rmb9,600bn pumped into the economy in 2009 alone, the move succeeded in jump-starting flagging growth but left serious concerns over the viability of many projects and the indebtedness of local governments nationwide.
The audit confirmed an explosion in borrowing in 2009 when outstanding local debt rose 62 per cent. But it also showed that the government began to get a grip on the problem last year, with debt growth slowing sharply to 19 per cent.
Combined with central government debt and other liabilities such as bad bank loans, analysts estimate China’s overall explicit debt load is about 70 per cent of gross domestic product.
But some analysts believe the contingent liabilities of the government are much higher, once debts on the books of state-owned enterprises and other entities implicitly backed by the state are included.
“If you take a very broad view of the Chinese government’s contingent liabilities rather than explicit debt on the books then the number comes to well over 150 per cent of China’s GDP in 2010,” according to Victor Shih, a political economist at Northwestern University in the US. The US has a debt-to-GDP ratio of 93 per cent, while Japan’s ratio is over 225 per cent.
Barred from borrowing money, Chinese local governments have created arms-length financing vehicles in record numbers to circumvent rules. The national audit office said there were 6,576 such vehicles, holding debts of Rmb4,971bn but previous estimates put the total debt load at closer to Rmb14,000bn.
Mr Shih said the discrepancy was caused by the latest audit taking into account loans to vehicles that were explicitly guaranteed by local governments. Many loans taken by them are backed by state land or other collateral rather than direct guarantees from local governments.
“This audit doesn’t present the full scale of local governments’ debt because it narrowly focuses on loans that are explicitly guaranteed,” Mr Shih said.
Highlighting problems, the audit office noted that some local governments had illegally invested borrowed funds in the stock and property markets, and that some debt was going unpaid or being covered only through new loans.