IF THERE IS a sliver of comfort in the National Audit Office’s tally of the debt being carried by China’s local governments it is that it is not as dire as feared. The state auditor says local governments’ outstanding debt at the end of June 2013 was 17.9 trillion yuan ($2.95 trillion), including contingent liabilities and debt guarantees. Some private estimates had put the number as high as 25 trillion yuan.
However, the published figure — assuming it is as comprehensive as billed, not necessarily a safe assumption — is still two-thirds higher than at end-2010, its previous count and the first time the numbers were made public. Factoring in central government debt, the country’s debt-to-GDP ratio is 58%, according to the audit office. That is not high by international standards, but the worry is that three-fifths of it is local-government debt, much of which was taken on by provincial and municipal governments to fund infrastructure projects, frequently through captive commercial investment companies used to get around the rudimentary system Beijing has for allocating tax revenues to provinces and cities for spending.
The fear is that these investment get-arounds won’t generate sufficient returns to pay operating and interest costs or to repay the loans taken on. The U.S. rating agency Moody’s said earlier this year that 53% of all municipal construction companies needed to restructure their loans. That indicates a potential rise in non-performing bank loans, especially at smaller (and weaker) regional and local banks, or the risk of local governments left holding the can — which in a country as state-centric as China would mean the can ultimately ending up in Beijing. As a dead-pan finance ministry reported to the National People’s Congress after the 2010 audit, “local governments face debt risks that cannot be overlooked.”
Central government has been containing new borrowing, using administrative guidance to banks to impose tighter lending standards and starting to expand municipal bond issuance as an alternative to land sales as a source of local government revenue. At the same time it has been eating or getting the banks to eat the worst of the loans that have gone sour to avoid any embarrassing collapses. This latest report heralds more of the same and a further urgent push on fiscal reform.