New Warning Issued on China Local Government Debt

September 27, 2013, 2:04 p.m. ET

New Warning Issued on China Local Government Debt

WILLIAM KAZER

BEIJING—China’s local government debt has nearly doubled since 2010, an official newspaper reported Friday, raising fresh concerns about potential repayment problems and the health of the banking system. The state-run Economic Information Daily, quoting the results of a government audit, didn’t give a figure for the new level of local debt. But a doubling of the total found in the last audit in 2010 would put the tally at around 20 trillion yuan ($3.28 trillion)—or almost 39% of the nation’s gross domestic product last year. China has been concerned that local-government debt levels were rising quickly as economic growth slowed and local administrations and the companies they hold stepped up borrowing to give the economy a helping hand. Most of China’s local governments are forbidden from borrowing money directly, so they have created local-financing vehicles to skirt the restrictions and raise funds for infrastructure and other projects. Those vehicles racked up massive debt levels in 2009 and 2010 as China rolled out a giant infrastructure-based stimulus program in the wake of the financial crisis.China clamped down on local-government debt issuance in 2011 as the economy showed signs of recovery, but a second slowdown pushed borrowing up once again as local governments resorted to new investments.

Alarmed, the National Audit Office announced in July that it would investigate local-government debt levels and release the results in October.

Vice Finance Minister Zhu Guangyao told journalists in July that the government was uncertain of the size of local debt but it was aware of the risks.

“A very crucial task for this administration is to clearly determine exactly how much debt there is in local-financing platforms,” he said.

A 2011 report by the National Audit Office put the total the previous year at 10.7 trillion yuan, equivalent to 27% of gross domestic product at the time.

The Economic Information Daily, which is backed by the official Xinhua news agency, cited auditors taking part in the latest probe as saying that financing channels such as so-called build-and-transfer projects were a major new contributor to local government debt.

While there was no indication of how much of the latest debt was in danger of going bad, the rapid rise in borrowing levels is at least a warning of possible problems at the banks that have extended credit.

As China’s economic growth slowed over the first half of 2013, concerns grew about the ability of local governments to pay back what they owe, particularly as much of the borrowed money may have gone into infrastructure and real-estate projects with little hope of generating a return in the near future, if at all.

The sharp rise in borrowings at the local government level wasn’t entirely a surprise, as some former officials and analysts had been putting the total at about the range stated in the newspaper report on Friday.

China’s former Finance Minister Xiang Huaicheng told reporters in April that local governments in China might have more than 20 trillion yuan outstanding in debt while the central government likely holds debts of 7 trillion yuan to 8 trillion yuan.

Liu Yuhui, a researcher with the Chinese Academy of Social Sciences, a government think tank, also estimated this month that local government debt likely had reached about 20 trillion yuan.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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