China orders audit of government debt

In the latest move underlining the new leadership's determination to straighten out the economy, Beijing will audit debts owed by all levels of government to assess the severity of the financial risks facing China.

The National Audit Office (NAO) made a one-sentence announcement on its website yesterday saying the audit was being done under instructions of the State Council, led by Premier Li Keqiang.

The decision comes amid rising concerns over local governments' repayment capabilities and the lack of transparency on their borrowing methods.

It also adds to evidence that Li and his cabinet are willing to accept some short-term pain to rebalance the economy.

"The new cabinet is resolute in ascertaining the risks facing the Chinese economy," said a Beijing-based source with knowledge of the government's thinking. "To a certain extent, the government wants to expose the problems caused by the former leaders."

Rising local government indebtedness is one of the major risks facing the economy as defaults could cripple the country's banking system and trigger social disorder.

The country's infrastructure-driven stimulus package in the wake of the global financial crisis in 2008 led to a lending spree as local governments resorted to heavy borrowing to bankroll the spurt of road, bridge and rail construction. At the end of 2010, total local government debts stood at 10.7 trillion yuan (HK$13.4 trillion), according to the NAO.