The Trillion Dollar Question: How Huge Is China's Local Government Debt?

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Early this month, I mentioned that there is some 14.4 trillion Yuan of debts owed by the local government financing vehicles (LGFVs).  That was based on an estimate by the People’s Bank of China, which put the estimate at no more than 14.4 trillion Yuan.

As it turns out, this is not the end of the story.  As mentioned early this year, the National Audit office started to look at the issues, and here comes their findings.  According to this report, the total local government debts amounted to 10.7 trillion Yuan.  Within this 10.7 trillion, 6.7 trillion Yuan of that (62.62% of total) was debt owed by the government, 2.3 trillion Yuan (21.9% of total) was debts guaranteed by the government.  The rest is contingent liabilities, which amounted to 1.7 trillion Yuan (15.58% of total).

So why the discrepancy?  The estimates by People’s Bank of China and the National Audit Office seem to be counting different things.  The estimates by the People’s Bank of China concerns with the LGFVs only.  Thus the 14.4 trillion Yuan of debts are those owed by more than 10,000 local government financing vehicles by the end of 2010.  The estimates by the National Audit Office, however, are produced after investigating on 25,590 governmental departments and institutions, 6,576 LGFVs, 42,603 organisations subsidised by the government, 2,420 public utilities organisation, and 9,038 others.  The National Audit Office’s figures suggest that the LGFVs they have surveyed collectively owed 4.97 trillion Yuan, while the other 5.72 trillion Yuan of debts are owed by other institutions.  So as far as the LGFVs debts are concerned, the latest figure is only some 35% of the estimates by the People’s Bank of China.

So which numbers are the correct one?  10.7 trillion, 14.4 trillion, or what?

If the 14.4 trillion figure by the People’s Bank of China is closer to the reality, then the latest LGFVs figure from the National Audit Office, i.e. 4.97 trillion, is a massive understatement.  If we stick to the 14.4 trillion figure for the LGFVs, we have to add other kinds of debts from the National Audit Office report (i.e. 5.72 trillion) to give a true picture, provided that the 5.72 trillion figure is not a massive understatement.  As Professor Victor Shih (who was the first to point to the problem of local government debts) pointed out just now, we should probably add that back to 14.4 trillion Yuan.  If that is a proper treatment, the total debt owed by the local governments (consolidated) will amount to at least 20 trillion Yuan.  If that’s a correct treatment, the grand-total government debts will amount to 88% of GDP (15% from central government, 5% from Ministry of Railways, 36% from LGFVs, further 14% from local governments arises from 5.72 trillion debt, 13% from policy banks, 4% from asset management companies, 1% of non-performing loans).

But we probably don’t have any confidence in any numbers at all.  If the LGFVs debts number is a massive understatement, how can we be sure that the 5.72 trillion number is not a massive understatement?

This article originally appeared here: The Trillion Dollar Question (Part 2): Confusion On The China’s Local Government Debts
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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