Local government debt to be exposed by Li's survey
Audit likely to reveal up to US$3 trillion of debt, with any austerity measures hitting demand
Like William the Conqueror before him, Premier Li Keqiang is initiating his own Domesday survey in China, and this time the attempt to curb local abuses of power will have global economic consequences.
The State Council, chaired by Li, has ordered the National Audit Office to begin auditing what could total US$2 trillion or US$3 trillion of debt taken on by local governments.
The Audit Office will suspend other work and give all staff "crash" training so that auditors can begin fanning out across the country this week, according to a report by the state-run People's Daily.
The clear implication is that the mainland is seeking to rein in local governments, which have helped along what is clearly a boom and may be a bubble by borrowing and spending freely on local development. For mainland China, this will act as another brake on already slowing growth. For the rest of the world, it means less demand, especially for the kinds of raw materials and energy which go into real estate development and infrastructure.
William ordered the 1086 Domesday Book census of property, so called because it was said to be as thorough and wide-reaching as the final judgment, shortly after the Norman conquest of England in order to nail down who owned what and who might have usurped something belonging to the crown he now possessed.
Li, who assumed office in March, has a related but different problem. Despite laws against it, local governments have taken on huge debts, an amount estimated by the last audit at about US$1.75 trillion at the end of 2010.
Analysts believe that has grown substantially since then, leading to growing concern about the country's overall debt profile. While the International Monetary Fund has estimated China's total government borrowing to be a bit less than 50 per cent of annual gross domestic product (as compared to about 100 per cent in the US) local government debt has grown faster, and pays a higher rate of interest, than forms of borrowing more tightly controlled by the central government.
Of particular interest is a story in China Business News, citing an unnamed source, which said the mainland had decided that it should cap its fiscal deficit at 3 per cent of GDP, well below the 5 per cent or more many economists estimate it may now be. To do that would likely require quite a savage cutting back on local government debt, or for central government to content itself with a smaller piece of the pie and all the diminished opportunities for reward, control and influence that implies.
Taking a step back, the most surprising thing about this whole story is that a government, much less one in a single-party state, needs an audit to know how much its constituent parts have borrowed. Little wonder ratings agencies have expressed concern about the debt practices.
But the relationship between local and central government is complicated, and, in fact, local authorities have exercised much discretion in directing development, and, despite rules to the contrary, contracted much debt to fund it.