China’s central government just completed its first ever audit of local government debt, and it turns out the locals are about Rmb10,700bn ($1,650bn) in the red, according to the Financial Times.
The amount of debt owned by China’s local governments at the end of 2010 is equal to 27% of the country’s GDP. Overall, China is holding debt equal to 70% of GDP.
China’s government aggressively lent to local governments in an effort to stimulate the economy in the wake of the global financial melt down. Outstanding local debt then surged to 62%, but last year the central government tried to get a handle on the problem by putting restrictions on borrowing.
To get around that, local governments just created financing vehicles to pay for projects. The audit revealed that $767.39 billion of the debt was held in such vehicles, though previous estimates had been higher. Auditors also warned that some local governments had illegally reinvested their debt in stocks or property markets, and that there was a chance it was going unpaid or simply being covered by new loans.
The central government has not said specifically what measures it will take to combat this debt problem, only that it may step in to assume some of the debt, and that it would look into developing more transparent ways to lend to local governments in the future.
But according to Societe Generale, that’s not enough. They think the vague suggestions currently on the table will be too little, too slowly to prevent this problem from striking again:
With regards to solutions, there are only vague unconfirmed mentions of local government bond sales, possible spin-offs, and bailouts from the central government. We still think it would take some time to put out a rescue plan that includes capital injection or write- downs. And any execution will be even more gradual, only some form of bond sale trials may be initiated as early as this year. We also expect the central government to reiterate the bans for further borrowing of local governments except for affordable housing projects.
In long term, none of above measures can prevent problems from recurring until China rebalances itself from investment-driven growth.
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