Beijing urged to act as rising local government debts threaten reform
Economists say lack of reform in legal and political systems are big barriers to fully embracing a market-oriented economy
Top mainland economists have urged the authorities to take more decisive action to rein in the country's mounting local government debt, saying the debt level is the biggest threat to economic reforms in the country.
They argue that the lack of meaningful reform in the judicial and legal system, as well as adequate adjustments in the political arena are key hurdles to fully embracing a market-oriented economy, as a more open system hurts vested interest groups and bureaucrats.
"Concerns over China's property market, local government debt, bank asset quality reflect an overly leveraged economy in which we have too much debt." Xu Xiaonian, an economics and finance professor at the China Europe International Business School, said yesterday in a forum hosted by Credit Suisse in Hong Kong.
Xu, a former economist with CICC and Merrill Lynch, said China's local and regional government debt will eventually trigger a crisis in the banking industry, spurring real reforms then.
Li Taokui, a former adviser to the People's Bank of China, said the local government debt problem will be a "mini-crisis" which is controllable since the banking system is underpinned by a high savings rate.
"The only way to solve the local government debt problem is to allow some defaults to take place and to restructure the debt afterwards. This would be something that will surely happen in the second half this year," said Li, a professor at Tsinghua University in Beijing.
Among the 31 mainland provinces, the highest level of indebtedness reached 156 per cent of revenues, while the lowest was 69 per cent, according to the National Audit Office, which also said the debt and guarantees by local governments soared by 67 per cent to 17.9 trillion yuan (HK$22.58 trillion) in June last year from the end-December 2010 reading of 10.7 trillion yuan.
About 14 to 34 per cent of the outstanding local debt will mature in 2014, indicating a different degree of refinancing risk, analysts with Moody's said in a report.
President Xi Jinping and Premier Li Keqiang are grappling with a surge in local-government debt as officials approve all sorts of infrastructure and environmental projects because economic growth is used as a barometer in determining promotions. Apart from economic reforms, Xu said China needs to create effective institutions to cut reliance on a centrally planned agenda designed by a few leaders and policy makers in Beijing.
"I don't believe that the country can solve any economic issues without touching upon any reforms of the existing judicial, legal, and political system," said Xu who joked that "people say the bubble will be different and keep growing. In fact, it turns out that every bubble is the same."