Audit Reveals Growing Local Government Debt

A recent report from China’s National Audit Office shows an increase in borrowing at the local government level. The audit, which covered more than 200 local government financing vehicles, indicates that local has risen up to 13% following the 2010 cycle. Dinny McMahon at The Wall Street Journal’s China Real Time Report has more on the situation among the 36 sampled local governments:

The audit found that the 36 governments had taken on debt totaling 3.85 trillion yuan ($624.6 billion) as of the end of last year, up 12.9% from the end of 2010. The last such audit measured local government debt as of the end of 2010.

The audit office said there had been some improvements since the end of 2010, with 24 governments having posted a reduction in their debt levels relative to their total fiscal resources. But it also said that the outstanding debt of nine provincial capitals at the end of 2012 was greater than their fiscal resources, with the level of one city reaching almost 190%, a level that rises to 220% if you take into account promises the government had made to guarantee the debts of other institutions.

The report also said that the interest and principal on loans that needed to be repaid at the end of last year by 13 provincial capitals – out of 15 in the sample – was equivalent to 20% of their fiscal resources, with the level reaching as high as nearly 68% for one unnamed city. Analysts say that in recent years, revenue for many local governments haven’t been enough to cover ordinary expenses such as wages and services, let alone debt repayments. At the beginning of the year, cities and towns around the country complained in their annual work reports that they were struggling to balance their budgets. [Source]

As land sales dwindle and bank loans become increasingly hard to come by, some regions are rolling over their debt to maturing loans while others are turning to new channels for funds. Minxin Pei warned at The Diplomat last year that shadow lending and other irregular government financing pose a big risk to China’s financial system.

Tea Leaf Nation’s Yueran Zhang traces the over-borrowing phenomenon to infrastructure-building at the local government level:

For local governments, the real deficit booster has been investment. In 2011, a research paper by scholars at Beijing Normal University and Peking University argued that county-level governments had a “productive expenditure bias” – that is, authorities are much more willing to spend on programs that directly stimulate economic production, especially , than on welfare and public service programs. Nowadays, economic performance is still used as a major criterion for the evaluation and promotion of local bureaucrats, while fiscal health is paid no attention during the process. This has incentivized officials to borrow as much as possible, and to invest what they borrow in programs that boost the GDP. [Source]

See also past CDT coverage of Chinese debt issues.

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