Economy

Local govt debt could trigger financial crisis

By Xiao Xin (China Daily)
Updated: 2010-06-24 09:46

BEIJING - The nation's chief auditor warned on Wednesday that local government debt will pose risks to the Chinese economy amid concerns that the debt could trigger a European-style financial crisis.

The ratio of debt to disposable revenues at some local governments has exceeded 100 percent, with the highest standing at 365 percent.

"The scale is large, and the burden is quite heavy," Liu Jiayi, director of the National Audit Office, said while making an annual audit report to the top legislature.

Liu came to the conclusion after an audit of the nation's budgets. Debt repayment pressure for some local governments is quite heavy, with the total public debt of 18 audited provinces, 16 cities and 36 counties amounting to 2.79 trillion yuan ($410 billion), he said.

Among those debts, 1.75 trillion yuan was accumulated before 2009, while 1.04 trillion yuan is new, accounting for about 37 percent of the total, he said.

China launched a $586 billion economic stimulus package in late 2008, and local governments have also stepped up investment to bolster the national economy amid the global financial crisis.

They generally make the investments using money pooled through the local financing units, which are intermediary companies through which the government borrows money.

The pro-active approach, however, has also led to problems such as local debt.

The local government debt could total between 6 and 11 trillion yuan for the nation as a whole, according to various estimates by researchers.

The overall risk is controllable since China's ratio of overall public debt to its GDP is much lower than that of other major developed countries, said Jia Kang, director of the Institute of Fiscal Science Research under the Ministry of Finance.

But as the European debt crisis has triggered serious social and economic problems, policymakers are paying more attention to the problem of local government debt.

The State Council issued a document on June 13, demanding stricter regulation of local debt to keep it under control.

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Relevant departments are studying methods to improve the management of local government debt, Liu said.

"New government debt must be strictly controlled to prevent financial risk evolving into fiscal risk," he said.

Liu also said that 96 percent of local government debt has been used to support the development of societal needs, such as public transportation and construction of public facilities.

Gao Qiang, director of the budgetary affairs commission of the National People's Congress (NPC) Standing Committee, said that information regarding local government debt should be reported to the NPC committee and the local financing units should be regulated and streamlined. An information disclosure system should also be put in place to prevent fiscal risks, he said at Wednesday's NPC meeting.