China’s local government debt crisis has been getting worse as national statistics show that 53% of local government debt will be due by the end of 2013

Crisis looms as local government debt to mature this year

Han Hwa-yu and Staff Reporter

2013-02-24

China’s local government debt crisis has been getting worse as national statistics show that 53% of local government debt will be due by the end of 2013, when local governments enter a peak period for repaying loans.

Financial reports recently issued by various local governments have all issued warnings, including information that they have been under heavy pressure to repay debts and deal with local financial risks that could not be ignored.

China’s National Audit Office says 42% of the debt was due by the end of 2012.

This year the local government debt crisis is greater than in the past few years due to increasing debts and mounting pressure to repay amid an economic slowdown and declining financial revenue, warned Zhao Quanhou, director of the Research Office of Finance under the Ministry of Finance’s Research Institute for Fiscal Science.

Since the central government does not allow local governments to raise funds by issuing bonds, they had turned to banks to borrow money to fund public infrastructure projects through financing vehicles.

In 2009, Beijing launched a 4 trillion yuan (US$640 billion) economic stimulus project, prompting local governments to raise funds to invest in public projects. While this successfully prevented the economy from sliding, the local governments’ debt maturity, which began last year, has posed a problem ever since.

Striking an optimistic note, Guan Qingyou, deputy research director at Minsheng Securities, said that judging from the National Audit Office statistics, China will have a 10-year government debt expansion period. However, he added that the country must prevent a government debt crisis.

Figures provided by various government agencies also show a mixed picture of the size of local government debt. The National Audit Office statistics show that as of the end of 2010, the debt incurred by three levels of local government — provinces, cities and counties — had reached 10.7 trillion yuan (US$1.71 trillion), accounting for 27% of GDP for the year.

Data from the country’s central bank, the People’s Bank of China, showed that loans borrowed by local government financing vehicles had touched 14.4 trillion yuan (US$2.31 trillion), while the China Banking Regulatory Commission statistics pegged the figure at 9.1 trillion yuan (US$1.46 trillion), a huge discrepancy.

Wang Chaocai, deputy director of the Ministry of Finance’s Research Institute for Fiscal Science, said that the country has yet to set up a complete mechanism for the management of local debt and that the demand for funds needed to finance local construction projects would also increase, bringing the risk of an ongoing and escalating crisis.