Opinion | Control of China's local government debt begins with an open book
Hu Shuli sets out key reforms to rein in runaway borrowing, including by promoting a bond market, as a nationwide audit gets under way
Among the ills afflicting the Chinese economy, a few are particularly deadly: the ballooning local government debt is one of them. No one knows for sure how massive it is, or how risky.
The nationwide audit that began this month will help to shed some light on these questions, but to stop risks growing past a tipping point, China must institute a system of debt control. This is the root cure, and is urgently needed.
Local governments have long struggled with indebtedness, but the problem was compounded by Beijing's post-2008 stimulus injection. Of the estimated local government debt of 10.7 trillion yuan in 2010 (HK$12.2 trillion then), more than 49 per cent was accumulated in the two years from 2009.
Any warning signs apparently went unheeded, as local governments tried to stay afloat by borrowing more. Since 2010, despite orders by both the State Council and various regulators to toe the line, the advent of "creative" financial products and policies have allowed officials to exploit any and every loophole. As a result, rising debt levels have created not only stress in the banking system, but also the existence of a massive shadow banking operation.
Borrowing more to pay off a debt is no solution, of course. But local governments do it partly because they really need the money, and it's fair to say most give no thought to how the money may be repaid. This is a result of "soft budget constraints", when politics - not economics - guides decision-making. The reasons for this are complex, and it's a hard habit to break. But the consequences are dire; indebtedness today grows quickly into crisis proportions.
Reforms - not mere tinkering - are urgently needed. And this requires leaders' resolve.
First, fiscal management must improve. After the audit makes clear the level of existing debt for each government at all levels, officials must clarify the level of their off-balance-sheet debt and debt-to-gross domestic product ratio, as well as set a cap on debt growth.