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Fears after key China debt level soars 70%
High quality global journalism requires investment.Local government debt levels in China have soared to almost $3tn in less than three years, according to an official audit highlighting one of Beijing’s most daunting challenges as it attempts to sustain economic growth while avoiding a financial crisis.
In a long-awaited report, China’s National Audit Office said local government debts had increased almost 70 per cent to reach Rmb17.9tn ($2.95tn) by the end of June. The NAO, whose last survey put the burden at Rmb10.7tn at the end of 2010, added that government debt levels were generally “under control” but identified “potential risks in some places”.
High quality global journalism requires investment. Monday’s audit, which included contingent liabilities and debt guarantees, was ordered by the State Council in June. Xiang Huaicheng, former finance minister, had previously estimated that local government debts could exceed Rmb20tn.
Chinese officials and analysts have long worried about the amount of debt racked up by local governments, which are not allowed to tap banks directly but establish special purpose vehicles to borrow money for investment projects. Such borrowing, often secured against local land values, helped China achieve impressive rates of growth even in the immediate aftermath of the global financial crisis
There are increasing fears, however, of a hard landing for the economy as Beijing enforces fiscal discipline on local government borrowers. China’s short-term funding costs approached 9 per cent earlier this month, before moderating towards the end of last week.
Speaking at the weekend, Chinese premier Li Keqiang said his government would guarantee “appropriate liquidity” and “reasonable growth in credit” next year. In a recent report to China’s parliament, the State Council predicted a final GDP growth figure of 7.6 per cent for 2013, compared to 7.7 per cent last year and a post-crisis high of 10.4 per cent in 2010.
The NAO’s latest estimate for local government debt is equivalent to a little more than 30 per cent of gross domestic product, compared to 25 per cent of GDP at the end of 2010. “The pace of [local government] debt accumulation in recent years has been too fast and is not sustainable,” said Wang Tao, economist at UBS.
According to Ting Lu, economist at Bank of America Merrill Lynch, China’s total public debt now stands at 53.3 per cent, with corporate debt estimated at 111 per cent.
“The markets and the Chinese government should be alarmed by the rapidly rising leverage,” Mr Lu said in a note. “But we do not believe China is on the brink of a debt crisis, especially if the new leaders can take decisive measures to arrest rising leverage.”
“The number is pretty much in line with expectations,” added Arthur Kroeber at GK Dragonomics. “The starting point in terms of managing it is stopping a new flow of local government debt.”
Bo Zhuang, economist at consultancy Trusted Sources, said that unlike its earlier audit, Monday’s NAO report had included a survey of village governments. He added that central government officials were particularly worried about the value of land pledged as loan collateral in China’s smaller cities.
Zhang Ke, a senior Chinese auditor, warned in April that local government borrowing was “out of control” and could spark a massive financial crisis.
Fears after key China debt level soars 70% - FT.com
High quality global journalism requires investment.Local government debt levels in China have soared to almost $3tn in less than three years, according to an official audit highlighting one of Beijing’s most daunting challenges as it attempts to sustain economic growth while avoiding a financial crisis.
In a long-awaited report, China’s National Audit Office said local government debts had increased almost 70 per cent to reach Rmb17.9tn ($2.95tn) by the end of June. The NAO, whose last survey put the burden at Rmb10.7tn at the end of 2010, added that government debt levels were generally “under control” but identified “potential risks in some places”.
High quality global journalism requires investment. Monday’s audit, which included contingent liabilities and debt guarantees, was ordered by the State Council in June. Xiang Huaicheng, former finance minister, had previously estimated that local government debts could exceed Rmb20tn.
Chinese officials and analysts have long worried about the amount of debt racked up by local governments, which are not allowed to tap banks directly but establish special purpose vehicles to borrow money for investment projects. Such borrowing, often secured against local land values, helped China achieve impressive rates of growth even in the immediate aftermath of the global financial crisis
There are increasing fears, however, of a hard landing for the economy as Beijing enforces fiscal discipline on local government borrowers. China’s short-term funding costs approached 9 per cent earlier this month, before moderating towards the end of last week.
Speaking at the weekend, Chinese premier Li Keqiang said his government would guarantee “appropriate liquidity” and “reasonable growth in credit” next year. In a recent report to China’s parliament, the State Council predicted a final GDP growth figure of 7.6 per cent for 2013, compared to 7.7 per cent last year and a post-crisis high of 10.4 per cent in 2010.
The NAO’s latest estimate for local government debt is equivalent to a little more than 30 per cent of gross domestic product, compared to 25 per cent of GDP at the end of 2010. “The pace of [local government] debt accumulation in recent years has been too fast and is not sustainable,” said Wang Tao, economist at UBS.
According to Ting Lu, economist at Bank of America Merrill Lynch, China’s total public debt now stands at 53.3 per cent, with corporate debt estimated at 111 per cent.
“The markets and the Chinese government should be alarmed by the rapidly rising leverage,” Mr Lu said in a note. “But we do not believe China is on the brink of a debt crisis, especially if the new leaders can take decisive measures to arrest rising leverage.”
“The number is pretty much in line with expectations,” added Arthur Kroeber at GK Dragonomics. “The starting point in terms of managing it is stopping a new flow of local government debt.”
Bo Zhuang, economist at consultancy Trusted Sources, said that unlike its earlier audit, Monday’s NAO report had included a survey of village governments. He added that central government officials were particularly worried about the value of land pledged as loan collateral in China’s smaller cities.
Zhang Ke, a senior Chinese auditor, warned in April that local government borrowing was “out of control” and could spark a massive financial crisis.
Fears after key China debt level soars 70% - FT.com
