China’s local government debt increases

PHOTO | MARK RALSTON Goods are delivered to a store in Beijing, China. The country is the biggest consumer of energy globally and is set to beat US to the top in oil imports.  AFP

In Summary

• Concerns have grown over the amount of money owed and its potential impact on the nation’s economy

By AFP
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BEIJING, Tuesday

China has announced the results of a long-awaited debt audit, revealing that liabilities carried by local governments ballooned to 17.9 trillion yuan ($2.95 trillion, about Sh250 trillion) as of the end of June.

The figure, released by the National Audit Office (NAO) in a statement on its website, compared with 10.7 trillion yuan as of the end of 2010 — an increase of 67 per cent.

Concerns have grown over the amount of debt in the country and its potential impact on the world’s second-largest economy, and Beijing embarked on the audit in July.

Disquiet about the burden centres on borrowing by local authorities, which have long used debt to fuel economic growth in their regions, often by pursuing projects that are not economically viable or sustainable.

China’s debt problem is considered to be a serious potential drag on its economy unless steps are taken to rein it in.

The local government debt burden was generally in line with economist estimates, including one made in early October by Bank of America Merrill Lynch of 17.2 trillion yuan.

“We believe the markets and the Chinese government should be alarmed by the rapidly rising leverage, but we do not believe China is on the brink of a debt crisis, especially if the new leaders take decisive measures to arrest its rising leverage,” economist Lu Ting of Bank of America, Merrill Lynch in Hong Kong, said in a note.

Mr Lu cited the central government’s “very low” ratio of debt to gross domestic product at 21 per cent.

As almost all government debt is denominated in China’s own currency and owned domestically, “the People’s Bank of China can prevent a public debt crisis with its unlimited capability for liquidity supply”, he said.

He added that China is protected by a trove of national savings, which include $3.5 trillion in foreign exchange reserves, its central and local governments own solid assets, and the country still enjoys high economic and fiscal revenue growth.

The NAO also said that direct government liabilities at the central and local level came to 20.7 trillion won as of the end of June.

While debt has helped the investment-based economy expand strongly, economists and the government itself believe it is unsustainable and the growth model should be rebalanced towards consumer demand. (AFP)