• Mon
  • Sep 22, 2014
  • Updated: 10:20am
PUBLISHED : Friday, 02 August, 2013, 12:00am
UPDATED : Friday, 02 August, 2013, 5:38am

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


As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.

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.



For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive



This article is now closed to comments

Thankyou whymak for your comments
which are informative and well argued as usual
"Compensations of CEOs classified as wages"
and downsizing which "Neutron" Jack considered "true kindness"
for not "keeping people around who aren't going to grow and prosper"
That's probably a way of transfer pricing
Part I
pslhk: your points "a refined ppp will be a good cross border measure... social justice within a country...something similar for cross-sector comparison of hourly return on labor." are well taken here.
For the longest time, expats commentaries preferred to use nominal GDP for China without adjusting for purchasing power parity, which is a better measure for living standard. I suspect their motive is in denigrating the importance of China’s contribution to the global economy by using the lower number. Of course, what matters most in any economy is the growth rate, i.e., what happens at the margin.
China has been the world's main economic engine. After the 2008 US meltdown, China contributes more than 50% to global economic growth. Don’t you think US, Europe and Australia should be grateful? Fat chance!
I prefer not to argue how much labor should be paid, especially when it gets emotional as in Chugani’s column. Labor or capital – factor prices – ought to be compensated for optimal output, depending on industrial structure and foreign trade.
Another issue of factor compensation has to do with economic and social stability. In the US labor gets about 2/3 of the output and capital, 1/3. These figures obtained from Solow growth model accounting have remained constant for decades.
Part II
pslhk: One must admit US capitalism is very stable for this reason. Digging a little deeper, one finds many clever tricks, which brainwash Joe Sixpacks with smoke and mirrors.
Corporate CEOs and hedge fund managers, the top 0.1 percent and higher, often get 9-figure compensations. They don’t belong to labor but the lion’s share of their incomes is classified as wage income. This creates the illusion that labor still gets 2/3 share. That’s why US median wage stagnates.
Dumb Joe Sixpacks go merrily to the polls, rest assured they have the power to hire and fire politicians. You must not underestimate the stranglehold of Democracy religion on voters in the West.
I don’t have Chinese economic figures. However, China’s wages are rising fast. Yet the Gini coefficient is getting worse. About 500 million constituting the middle class are getting sizable wage increases. The bottom is doing better too, but their share of national income is squeezed by the top earners. This is China’s political headache and social Achilles.
SpeakFreely (sequel to one below): Period payment obligations to operating income, a measure for debt coverage ratio, is meaningful in assessing a firm's short-term liquidity for bond investors. Like most other measures used to gauge a firm's financial health or macro- economic stability, this is just one of many that is needed to be configured into a figure(s) of merit – degustation menu: 1 from column A, another from B, etc. – for empty suit bosses.
SpeakFreely: For a change, I see you ready to abandon hateful ideology to discuss business and economics. Just two short answers to your questions.
Debt to total capital for US firms varies from year to year. By capital, I means weighted debt and equity capital, with each mark-to-market. This number fluctuates around 40% for S&P 500 in those years when I was active in corporate business development. That puts market debt to market equity at only about 0.67. The number I gave is based on shareholders equity/retained earnings, which is much lower than market value of stocks. It is a reasonable number for long-term macro planning due to stock price volatility. In a business project, one uses weighted (market) costs of capital as a hurdle rate to establish its merit.
Don't count on the household net worth to service debt. When markets crash, fire sale is the order of the day. NASDAQ's drawdown to only 26% of its value is still fresh in memory. The destruction in wealth of both real and financial assets in the US in year 2008 is estimated between 13.5T and 15T.
Illiquidity and insolvency mean different things.
Many home values in Arizona and Las Vegas were cut by 1/2. If a firm has negative operating income, one could still value it by options pricing model. But if it files Chapter 7 or Chapter 11, its shareholders will be at the mercy of the court and bondholders, not to mention astronomical fees of lawyers, accountants and court appointed trustees.
As thoughtful and knowledgeable whymak insists that you’re neutral
that’s good reason to see if a more open mind may help me appreciate better
Talking about national equity
The US will, or has just started to, include IP in its reported GNP
Goodwill and Military power (the latter as per Mad Money of Susan Strange?)
pivotal factors are yet to be accounted, or properly accounted, for
I think a refined ppp will be a good cross border measure
For the discussion of social justice within a country,
we may need something similar for cross-sector comparison of hourly return on labor.
Now I must run to start my Sunday hiking.

Whymak: US household wealth is over 70T, still highest in the world, vs household debt of around 11T according to figures from Fed recently.
"Household debt fell to $11.2 trillion in the first quarter compared with a peak burden of $12.7 trillion in the third quarter of 2008. Consumers reduced debt by $110 billion after increasing their borrowing by $31 billion in the fourth quarter of 2012, while delinquency rates fell “across the board,” the Fed district bank said in a statement. Student debt bucked the trend, rising to a record $986 billion."
"American families' wealth grew by $3 trillion in the first quarter to reach an all-time high of $70.4 trillion, the Federal Reserve said Thursday. That topped the previous peak of $68 trillion in the third quarter of 2007, just before the recession began."
Lets not just look at debt to income ratio. why. mr. Li two corporations has higher debt ratio than me ( as mine is zero) or most people in HK, does it mean I'm richer than Mr. Li?
I rather look at debt to equity ratio.
WhyMak: I don't know where u get the number that US corp is 200% debt ratio. It looks high to me. If u read Fiancial Time in May 2013
"Based on a stronger rate of economic growth that propels debt issuance, China's non-financial corporations could owe $13.8 trillion by the end of 2014, eclipsing U.S. corporations' outstanding debt of $13.7 trillion. A slower expansion of debt based on the growth of the economy would see China pass the U.S. in 2015, said S&P."
If you check mkt cap of Dow, S&P 500, Nasdaq, and Russel total around $30T but this does not include everything yet. If The above quote from FT is right with 13.7 debt vs 30T mkt cap I don't see how u get the 200%. Rather if China Corp 13.8T with a probably smaller mkt cap, would u think the debt ratios is much higher?
"I don't think we should hold SCMP commentators under the pressure of daily deadline to be always accurate or consistent."
That's my thinking too
I don't know if TH writes his column's headlines
which I often find sensational or depressive
With due respect
TH's analyses are often too formal
Generalizations based on formal analyses of data not sufficiently representative of the issue under discussion tend to be misleading.
While JvdK may have more practical experience
I disagree with JvdK too
when he is over-reliant on formal analyses to over-generalize.

For example
"Don't expect answer from China local government debt audit"
It really depends on what one expects
Reasonable expectations should be realistically contextual
If discrepant findings were the cause for the commission of a new audit
that in itself indicates the need for something
which can’t be the “no answer” TH predicted.




SCMP.com Account