China exposes US$120 million local government debt scandal
Beijing vows to punish officials involved in using taxpayers’ money to pay off debts incurred by authorities in central China city
A fresh scandal involving 818 million yuan (US$120 million) of murky local government debt has been exposed by China’s finance ministry, in another demonstration of Beijing’s determination to clean up the troublesome sector.
The municipal government of Zhumadian, a city in central China’s Henan province, is the latest to be caught out by the central government for borrowing irregularities. It is the third local authority to be named and shamed this year, following Qianjiang, Chongqing municipality in March and Zoucheng, Shandong province in April.
According to a statement posted on the finance ministry’s website on Friday, the Zhumadian government in September 2015 used taxpayers’ money to repay loans and cover interest payments incurred by one of its financing vehicles, which it then billed as “government service procurement”.
“We have closely coordinated with the National Audit Office to crack down on such irregularities or violation of laws,” Wang Kebing, deputy head of the finance ministry’s budget management department, told a media briefing in Beijing.
“Our provincial authorities are following some investigations ... and we will punish [the officials involved] once confirmed,” he said.
The finance ministry is currently playing a game of cat-and-mouse with several local governments. Despite Beijing’s efforts to set clear boundaries between government debt and corporate liabilities, it is often hard to separate local governments from the debts incurred by their corporate vehicles.
Earlier this year, Moody’s downgraded China’s sovereign rating for the first time since 1989, citing the country’s rising debt level.
After years of investment stimulus since 2008, China’s local governments have built up a mountain of debt, and raised fears at home and abroad of its potential to weigh on the banking system and bring an unprecedented level of risk to the country’s financial stability.
Since auditing the scale of local debt in 2013, Beijing has sought to regulate its growth by setting a cap on annual bond issuances and preventing illegal financing via the new Budget Law, which came into effect in January 2015.
According to official figures, China’s local government debt totalled 15.3 trillion yuan at the end of last year, comprising 10.6 trillion yuan of bonds and 4.7 trillion yuan pending bond replacement.
A growing concern is that many local governments are accumulating more implicit debt through a variety of means, including guarantees, trust products and, most recently, the public-private partnership (PPP). The fear for Beijing is that this, together with the contingent debt incurred by financing vehicles, will end up being shouldered by the central government.
“Local financing vehicles are ordinary corporations and [since the enactment of the new Budget Law] receive no more government backing for their debt. Their debt will not be paid with taxpayer’s money,” Wang said.
Meanwhile, the finance ministry said in its circular released in May that it has stepped up its scrutiny of project financing.
Wei Qiang, spokesman for the National Audit Office, said that the government has set a red line on PPP projects that do not belong to the government debt.
“Overall it functions well and no ... violations have been found yet,” he said.
The audit office said last week that the outstanding debt of 16 selected cities around the country has risen by 87 per cent over the past four years, but claimed that China’s debt level is “overall controllable”.