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.
This Bystander is not so much shocked as wearied by the latest revelations of embezzlement from China’s scandal-plagued high-speed rail network. The National Audit Office says that a second audit of the Beijing-Shanghai line, the centerpiece of the country’s rapid expansion of its high-speed rail network, has found that 491 million yuan ($78 million) has been skimmed off the project by “irregular practices in the construction and management”.
A first audit conducted in 2010 revealed that 187 million yuan had been stolen from the project, which went into commercial operation last June. The picture above shows the first southbound train nosing its way out of Beijing South station, carrying prime minister Wen Jiabao, who inaugurated the service on the 1,318-kilometer now five-hour journey. We are not clear if the latest number tops up the first audit or is in addition to it, but either way it is a tidy sum. The money seems to have been lifted from several pots: the compensation fund for residents whose homes were demolished to make way for the tracks; 413 million yuan of cancelled contracts for wind-shielding barriers that somehow still got paid out in part; 849 million yuan of procurements not carried out in accordance with the standard bidding process; and accounting practices that seem to have no problem with processing fake invoices.
In all, it has been estimated that 3% of the 2 trillion yuan China has spent on building its high-speed rail network has been skimmed off one way or another. The rush to build not only created a giant honey-pot for contractors, suppliers and middlemen, but also one that was’t closely scrutinized. It has subsequently triggered allegations that safety, too, was sacrificed in the cause of speed, both of the trains and the pace of the network build-out. The consequences continue to reverberate. Earlier this month a section of track in Hubei collapsed, apparently because inferior materials were used in the construction of embankments.
The new Beijing-Shanghai audit also says that the company that built the line owes more than 8 billion yuan to suppliers and construction workers. Then railways minister Liu Zhijun was sacked in February 2011, a month before the announcement of the results of the first audit. It has since become clear that corruption surrounding the building of the high-speed rail network spread a long way down from the highest levels. Some officials of the Beijing-Shanghai High-Speed Railway Co. Ltd., and their suppliers, are, no doubt, now looking nervously over their shoulder.
The surprise about the finding of state auditors that 187 million yuan ($28.5 million) had been embezzled by individuals and construction companies working on the Beijing-Shanghai high-speed rail line is that the sum is so small. The estimated cost of the upgrade to the 1,318 line, the showpiece of the country’s corruption-plagued high-speed network, is now 217.6 billion yuan (up from the original estimate 160 billion yuan, incidentally). The fake accounting that the auditors have turned up amounts to less than a rounding error. Really?