Don't expect answer from China local government debt audit
Fifth survey of mainland municipalities' finances in recent years is unlikely to shed light on the matter, despite what financial analysts say
The announcement last Sunday that China is to conduct an urgent audit of local government debt shocked markets, triggering a 1.7 per cent fall in the Shanghai composite stock index on Monday.
For the most part, however, financial analysts greeted the news positively.
"The new audit … will improve the limited transparency of the amount of local government debt outstanding," commented credit rating agency Moody's Investors Service.
"A comprehensive audit would be welcome in clarifying the magnitude of the local government debt burden," concurred Hong Kong-based analysts at Spanish bank BBVA.
Maybe it will, but don't count on it.
After all, this is the fifth survey of local government debts in the last few years, and none of the preceding four did much to shed light on the matter.
According to the last "comprehensive" audit by the National Audit Office (NAO) - the body charged with carrying out the new inspection - the combined debts of China's provincial, county and city governments at the end of 2010 came to 10.7 trillion yuan (HK$13.5 trillion), or 27 per cent of gross domestic product at the time.
The NAO reckoned that 8.5 trillion yuan of that had been borrowed from the state banks. But the China Banking Regulatory Commission put the end-2010 figure for bank loans to local governments at 9.2 trillion yuan.
Then the People's Bank of China came out and said that borrowing by local governments could have been as high as 14.4 trillion, or 36 per cent of GDP.
More recently, in June this year the NAO published a survey of 36 local governments which put their debt at 3.9 trillion yuan.
Applying the 13 per cent growth in those governments' debt between 2010 and 2012 to the NAO's 2010 figure would put nationwide local government debt at the end of 2012 at 12.1 trillion yuan, or a relatively modest 23 per cent of GDP.
The reason for this multiplicity of numbers is each agency was counting different things.
The NAO claimed it was counting both the direct debts of local governments and the debts run up by their financing vehicles. However, its audit excluded town and village governments, and the definition of financing vehicles it used may have excluded many arm's-length investment companies.
The central bank, meanwhile, said it was measuring only the debts of local government's investment vehicles, not their direct borrowing. Put the two results together, and it seems likely that the actual level of municipal debt in China at the end of 2010 was somewhere in the region of 16 trillion yuan.
If we then assume that the 13 per cent growth of debts in the recent NAO sample is representative, then the real level of local government debts would now be around 18.5 trillion yuan.
But even that may understate the true level of local indebtedness. That's because the 13 per cent debt growth over two years detailed in the recent NAO survey would represent an 80 per cent slowdown in the rate at which local governments have been accumulating debt compared to the years before the financial crisis.
If debt accumulation had actually only slowed to half the pre-crisis rate, which seems a more reasonable assumption, then the true level of local government debt at the end of 2012 would be 20 trillion yuan.
By coincidence, 20 trillion yuan is the figure former finance minister Xiang Huaicheng came up with for local government debt back in April.
That's an uncomfortably high 38.5 per cent of GDP, a level which would push overall gross government debt in China up to almost 80 per cent of GDP.
No wonder Beijing has ordered a new audit, but don't expect a clear answer when the results come out in a few months.