In the latest move underlining the new leadership's determination to straighten out the economy, Beijing will audit debts owed by all levels of government to assess the severity of the financial risks facing China.
The National Audit Office (NAO) made a one-sentence announcement on its website yesterday saying the audit was being done under instructions of the State Council, led by Premier Li Keqiang.
The decision comes amid rising concerns over local governments' repayment capabilities and the lack of transparency on their borrowing methods.
It also adds to evidence that Li and his cabinet are willing to accept some short-term pain to rebalance the economy.
"The new cabinet is resolute in ascertaining the risks facing the Chinese economy," said a Beijing-based source with knowledge of the government's thinking. "To a certain extent, the government wants to expose the problems caused by the former leaders."
Rising local government indebtedness is one of the major risks facing the economy as defaults could cripple the country's banking system and trigger social disorder.
The country's infrastructure-driven stimulus package in the wake of the global financial crisis in 2008 led to a lending spree as local governments resorted to heavy borrowing to bankroll the spurt of road, bridge and rail construction. At the end of 2010, total local government debts stood at 10.7 trillion yuan (HK$13.4 trillion), according to the NAO.
In June, the audit office said debts of local government financing vehicles in 36 select cities grew 13 per cent from 2010 to 2012. Global banks estimate total loans to the vehicles could hit US$3 trillion, about a third of China's economic output.
"We had suspected that Premier Li would want to drive significant reforms; we underestimated, however, his apparent willingness to make policy choices that would risk putting further downside pressure on the economy," Standard Chartered Bank said in a report.
The People's Daily said the audit order was an urgent one from the State Council and work could start this week.
Since taking office in March, Li has shown his resolve in rectifying past policies in order to minimise financial risks.
Last month the central bank refused to ease money supply even as commercial lenders lobbied for injection of fresh cash into the banking system after interest rates on the interbank market surged to record highs. The capital crunch was seen as a warning by the leadership against reckless lending habits. Top banking regulators, however, insisted the cash squeeze was a temporary phenomenon.
The order to audit government debt also reflects the new leadership's resolve to maintain a tighter grip on local governments as a way to ensure consistency in policymaking. Rivalry at the local level has been the bane of policymakers as lower-level government officials tend to inflate growth figures with debt-driven infrastructure work while hiding from Beijing the economic risks.
Vice-Finance Minister Zhu Guangyao admitted this month that the central government was unaware of the exact amount of local government debts.