China gov: just as much in debt as others
June 27, 2011 by Jules
Combining local and central government debt, the Communist government has accumulated debt equal to 70% of GDP.
The following information is based on reports of the same news release by the Financial Times and Wall Street Journal:
Additional historical information from the FT's alphaville is available here and here (behind paywall).
China's local governments had amassed 10.7 trillion yuan ($1.65 trillion) of debt by the end of last year, Liu Jiayi, auditor general of the country's National Audit Office, said Monday. That's equal to more than a quarter of China's 2010 gross domestic product of 39.7983 trillion yuan.
The indebtedness of Chinese provinces and cities has long been one of the big question marks hanging over the world’s second-largest economy, but the figures released on Monday indicated that the problem, while large, was manageable. The amount owed by local governments at the end of 2010 was equivalent to about 27 per cent of China’s economy. Combined with central government debt and other liabilities such as bad bank loans, analysts estimate that China’s overall debt load is about 70 per cent of gross domestic product, an easily digestible amount for an economy that is still growing at near double-digit pace.
Debts assumed by local governments have become a key risk factor for China's financial system following the country's post-financial crisis stimulus package, which was fueled by bank lending and infrastructure spending.
Over half of the debt was generated before 2009, or was used to finance projects that started before 2009, the audit office said, suggesting the loan-powered stimulus of 2009 and 2010 effectively doubled the debt. However, the audit was marked by inconsistencies with reports by other parts of the government, and it also flagged a series of problems including misuse of funds and rising defaults.
The audit confirmed that there was an explosion in borrowing in 2009 when outstanding local debt increased 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.
The audit office said 46.4% of the debt is held by intermediary vehicles called local government financing platforms, but didn't specify how the rest was raised. Local governments can't take on debt or issue bonds directly, although in recent years the central government has begun issuing bonds on their behalf. Mr. Liu said China is studying allowing provincial governments and qualified city-level governments to raise debt directly.
Earlier this month the central the People's Bank of China made a substantially higher estimate of local indebtedness, saying that more than 10,000 local government financing vehicles had taken out loans as of the end of last year, and that such borrowing accounted for up to 30% of all outstanding yuan loans in the country. That would indicate loans to local governments of as much as 14.37 trillion yuan, based on central-bank data showing that China's outstanding yuan loans at the end of 2010 totaled 47.9 trillion yuan.
A key question now will be how China manages the local government debt pile. Some loans were for infrastructure projects such as rail lines that may be self-financing. For others, the central government may have to bail out local governments, or banks may have to face losses. Projects that are generating profits should should assume responsibility for their own debt, which should be separated from other local-government debt, with some government subsidy where necessary, Mr. Liu said in comments published on the audit office website.
He said a comprehensive plan for repaying other local-government debts is required. Of the 10.7 trillion yuan, local governments are entirely responsible for repaying 6.71 trillion yuan, or 62.6% of the total,. Debt guaranteed by local governments came to 2.34 trillion yuan, or 21.8% and debt that governments may be required to repay came to 1.67 trillion yuan, or 15.6%, he said.
The audit office has uncovered "irregular" borrowing or debt issuance by some local government entities, Mr. Liu said, adding that some 35.1 billion yuan in local government debt has been improperly diverted into capital markets, real estate, or highly polluting and energy-intensive industries.
In: Market News