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Some 700,000 local government financing vehicles are used by provincial and lower level governments to evade restrictions on borrowing. Photo: AFP

China upgrading local government financial monitoring system to rein in ‘hidden debt’

  • China is strengthening a national monitoring system that keeps tabs on some 700,000 local government financing vehicles
  • Beijing has launched a number of programmes to rein in excess local debt and risky bank lending in recent years

China is upgrading a system used to monitor the income and expenditure of hundreds of thousands of financial entities used by local governments to borrow money in a bid to rein in debt.

Some 700,000 local government financing vehicles, which are used by provincial and lower level governments to evade restrictions on borrowing, are operating in China and are thought to be a major source of “hidden debt” in the world’s second largest economy.

The Ministry of Finance has invited potential bidders to upgrade the nationwide system with the aim of “logging every change of debt at any financing vehicle” and offering the ministry a platform to conduct regular monitoring and risk assessment.

The monitoring system, which was introduced in September 2018, already keeps track of a dizzying array of information, including the debts owed by each vehicle, the type of debt, maturity, as well as information on repayment, asset quality and valuation changes. But the upgrade will strengthen oversight at a time where there are signs of growing financial stress across the country.

The procurement announcement offers a rare glimpse into the possible scale of China’s excess debt and Beijing’s approach to managing its potential risk.

Government figures on the total size of local government debt have been rarely released since 2013, but it is becoming a major concern in Beijing, which has launched programmes to rein in excess borrowing and risky bank lending over the past two years.

In 2013, more than 50,000 auditors from the National Audit Office were dispatched to check debts in 31 provincial areas, 291 municipal zones, 2,778 counties and 33,901 towns. After completing the survey, they concluded that local governments had an outstanding debts of 10.9 trillion yuan (US$1.5 trillion) at the end of June 2013.

Finance officials later implemented campaigns to drive down unmanageable debt loads, including a 2015 programme to swap high-interest rate debts to bonds with lower rates.

China’s official local government debt, measured in local government bonds, stood at 21 trillion yuan (US$2.97 trillion) at the end of September this year, finance ministry data showed.

But some independent estimates have put the hidden debt at much higher levels. The rating agency S&P calculated last year that hidden debt incurred by local governments may have been as high as 40 trillion yuan (US$5.6 trillion) at the end of 2017.

The 18.78 million yuan (US$2.6 million) upgrade will support greater information sharing between the Ministry of Finance and other financial institutions, including locally issued corporate debt and borrowing by trusts and financing vehicles.

Relevant financial regulators will be alerted to any “sizeable debt” two months before it is set to mature, followed by reports on the debt payment status.

Local governments will also be required to make monthly updates on their outstanding debt and any changes to assets they hold. Late reporting or falsification of data will be recorded in the system and serious offenders will be classified as “untrustworthy” in China’s nationwide credit information monitoring system Credit China.

Debt is big issue dragging on China’s economic growth. The debt ratio to gross domestic product was 304 per cent at the end of March this year, up from 297 per cent a year earlier, according to estimates from the Institute of International Finance.