Race to defuse Chinese debt time bomb hampered by local officials’ reluctance to reveal extent of borrowing
Threat of punishment may be one reason why municipal authorities are failing to be fully transparent about full extent of liabilities
Municipal governments across China are reluctant to give a clear picture of their debt structure and sources of contingent liabilities, a survey has found, a tendency that undermines Beijing’s efforts to defuse a debt time tomb.
About 201 of China’s 295 cities released outstanding debt figures, including special bonds and general liabilities, but only 37 cities published breakdowns, according to research released by the Public Policy and Management School at Tsinghua University on Tuesday.
The average transparency rating in the appraisal, which checked local disclosure of a series of indicators, was only 20 out of 100. Some governments earned no credit in this aspect, according to the research.
“Local governments might be very sensitive to disclosure of any inappropriate debt raising given central authorities’ threat... of holding officials accountable,” Yu Qiao, who leads the annual study, was quoted by China Economic Weekly as saying.
Local government debt was one of the major risks highlighted at a national financial industry conference last month, at which Chinese President Xi Jinping said that local cadres would be held accountable for debts accumulated under their watch.
Figures released by the Ministry of Finance indicated that confirmed local government debt had reached 15.3 trillion yuan (US$2.3 trillion) by the end of last year.
However, the Chinese government has repeatedly assured the outside world that the overall debt situation is “controllable”.
At the same time, local governments’ implicit and contingent liabilities – via state-owned enterprises, financing vehicles or credit guarantee – remains a big market concern.
China’s rapid increase in debt was a major factor in international rating agency Moody’s decision to downgrade the country’s sovereign credit a notch from Aa3 to A1 in May, the first time in nearly three decades.
A majority of local authorities tended to disclose their bond sales, but failed to reveal their contingent debt incurred from their financing vehicles and borrowing from financial institutions, the Tsinghua University study found.
It may be hard to provide such breakdowns since some financing vehicles carry de facto government liabilities, and the government’s credit guarantee is hard to find from a technical perspective, Yu added.
After the first national audit in 2013, Beijing started to swap local debt with more transparent bonds, allow municipal bond sales, cap local debt size and regulate new borrowing with the strict implementation of the new budget law.
The Tsinghua University research found that 235 cities did not provide information about industry investment funds, while 127 cities did not reveal local financial input in public-private partnership projects. Both are believed to be sources of new debts that have been used to fund local construction projects.
The National Academy of Economic Strategy at the Chinese Academy of Social Sciences, a government think tank, said last Thursday that China’s total government assets were sufficient to cover aggregate liabilities. Even if debt was estimated at a maximum of 70 trillion yuan in 2015, Beijing still had net assets of 50-60 trillion yuan.