Cabinet Orders Audit of Government Debt

China’s State Council has ordered an audit of all government debt, according to Reuters, a sign that policymakers are concerned with rising debt at the provincial and municipal level amid a slowdown in economic growth:

The audit office, responsible for overseeing state finances, made the announcement in a one-sentence item on its website, but gave no details on the audit.

The official People’s Daily newspaper said separately on its website, citing unidentified sources, that an urgent order for the audit was issued on Friday and work will start this week.

The audit could indicate increased official concern over the systemic risk from rising debt levels in China, especially debt of local governments, as top leaders slow economic growth in order to promote reform. [Source]

China’s National Audit Office published a report last month detailing an increase in borrowings at local governments since 2010, much of which can be attributed to spending on infrastructure and other development projects to drive growth. Economists worry that some of the most debt-burdened local governments, such as Jiangsu province, may pose a risk to the broader financial system in China. And as The Wall Street Journal reported today, ballooning debt levels limit the options of economic officials as they look to address sluggish growth this year:

China’s gross domestic product growth slowed to 7.5% year-to-year in the second quarter of 2013 from 7.7% in the first quarter, and many economists expect it to slow further in the second half. One option for the government to prevent a sharper slide is to ratchet up public spending.

But high debt means there is a limit to the government’s ability to act. China’s central government debt is low—14.4% of GDP in 2012, according to the International Monetary Fund. Concern centers on rapid growth in borrowing by local governments.

In response to the 2008 financial crisis, many circumvented rules preventing them from taking on debt by setting up investment vehicles to borrow, funding a wave of infrastructure investment. The People’s Daily article said the audit will move quickly into China’s provinces. [Source]

The South China Morning Post’s Daniel Ren wrote today that the audit signals the willingness of Li Keqiang and other top leaders to identify problems with the economy and even endure short-term pain to rebalance it:

“The new cabinet is resolute in ascertaining the risks facing the Chinese economy,” said a Beijing-based source with knowledge of the government’s thinking. “To a certain extent, the government wants to expose the problems caused by the former leaders.” [Source]

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