Local government debt shows needs to reform financial and tax system
Analysts have long cited a lack of transparency in local government borrowing activities on the mainland as reason for deepening unease, given the disclosure in 2011 that by the end of 2010, local authorities had run up total debt of 10.7 trillion yuan (HK$13.6 trilion). It has turned out to be a well-founded concern. In a long-awaited report ordered by the State Council, the National Audit Office says local government debt, including contingent liabilities and guarantees, had risen by nearly 70 per cent to 17.9 trillion yuan by the end of June. While this may not mean that China is facing a crisis, it has raised serious concerns about the health of the country's economy and the debt problem generally.
To put the figure into perspective, the debt of the central government, which takes the lion's share of public revenue, stood at 12.4 trillion yuan. Starved of revenue, local government has accumulated trillions in debt for infrastructure investment, partly from the largely unregulated shadow-banking sector. The audit report shows that shadow banks accounted for at least 13 per cent of all local government borrowings. This adds to the concerns of global investors about the extent to which loans have turned sour. The NAO's report follows the findings of the latest quarterly China Beige Book (CBB) survey, which said the proportion of new credit, as opposed to loans to roll over unpaid debt, had shrunk for the seventh consecutive quarter. Only 14 per cent of the bankers questioned in the CBB survey said 30 per cent or more of their branch lending went to new customers in the fourth quarter.
Mainland officials may say that the current debt level is manageable, and local officials know Beijing will bail them out. But the significant rise is really cause for concern as local authorities go on a spending spree on infrastructure and other projects financed by heavy borrowing. There is already anecdotal evidence that many Chinese cities are basically bankrupt because they cannot repay their debt. The financial stress accounts for local governments' extensive and often heavy-handed involvement in land dealing. Researchers at the China Index Academy forecast local authorities' land sales revenue would hit a fresh record above 3 trillion yuan this year as they try to raise enough funds to meet their obligations. Local government debt reflects the urgent need to reform China's financial and tax system, including the division of revenues between local authorities and the central government.