Inner Mongolian city lives on borrowed money

A city in the autonomous region of Inner Mongolia known for its empty skyscrapers is struggling to repay debt and has resorted to borrowing from companies to pay workers, a magazine published by Xinhua reported.

Some district governments of Ordos had to borrow money from companies to pay salaries of municipal employees, Economy & Nation Weekly said in a report on its website last week. Local government entities in the city had amassed 240 billion yuan (HK$300.8 billion) of debt, while the city had 37.5 billion yuan of revenue last year, the report said.

The report adds to signs of strains in an economy that probably decelerated for a second quarter between April and June as overseas and domestic demand slowed and Premier Li Keqiang reined in credit growth.

"Isolated default cases will happen in places like Ordos - people know investment in these places is unsustainable," said Ding Shuang, senior China economist at Citigroup in Hong Kong.

Deputy Finance Minister Zhu Guangyao said last week that China should be on "high alert" to risks in local government debt. Coal-rich Ordos is known for a building frenzy in recent years, including a new area named Kangbashi that was designed to accommodate 300,000 people.

Ordos had gross domestic product of 365.7 billion yuan last year and two million residents, according to the local government, giving it a per capita GDP close to Hong Kong's.

The government's debts included delayed payments to builders and loans from companies, the magazine said.

Ordos' Dongsheng district had the most debt with at least 120 billion yuan, followed by Yijinhuoluo district with about 70 billion yuan, it said.

The expansion of government payrolls was another reason for Yijinhuoluo's debt, a local government employee said, adding that officials with section-chief rank or higher could take a form of retirement at the age of 50, retaining salaries and benefits without having to work.

Citigroup has lowered its estimates for mainland growth this year to 7.4 per cent from 7.6 per cent and to 7.1 per cent from 7.3 per cent next year. Fixed-asset investment growth would lose steam as credit for local government financing vehicles dried up, Ding said, and this was the "major underlying factor for us to cut China growth forecasts".

China Banking Regulatory Commission chairman Shang Fulin said last month that most local debt was guaranteed with assets and the "overall risk is controllable".