By Simon Rabinovitch in Beijing
Chinese local governments owe Rmb10,700bn ($1,650bn) in debt, according to the first audit of local governments by the central government.
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.
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 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.
Worries flared up about the fiscal health of Chinese local governments during the global financial crisis, when Beijing unleashed a flurry of costly infrastructure projects to stimulate growth.
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.
Technically barred from borrowing money, local governments have created arms-length financing vehicles in record numbers in recent years to circumvent restrictions.
The national audit office said there were 6,576 such vehicles, holding debts of Rmb4,971bn. However, earlier this month, the central bank said they local governments owed nearly three times as much at Rmb14,000bn.
The audit office did not explain why there was such a big discrepancy. Officials have previously warned that a lack of transparency would make it difficult to know the full extent of the problem.
Highlighting risks, 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. But it suggested the scale of such irregularities was tiny, counting, for example, only Rmb8bn of overdue debt on the books of local financing vehicles.
The audit office said the central government might eventually step in to assume some of the debt and noted that Beijing was also looking to develop better-regulated channels for local governments to borrow money in the future.
? The Financial Times Limited 2011