Local governments in China addicted to debt

Local governments in China addicted to debt

Staff Reporter 

2014-03-13

Local governments in China have incurred massive debts to fund huge infrastructural projects, a practice dubbed by scholars as an addiction which may prove difficult to wean, reports the China Youth Daily, the official newspaper of the Communist Youth League of China.

Dong Dasheng, a member of the Chinese People’s Political Consultative Conference and deputy auditor general, told the paper that while total municipal debts, which have swelled to around 18 trillion yuan (US$2.9 trillion), are still manageable, the prospects are worrisome as municipal governments have continued amassing debts in a quest for high GDP growth. They are undertaking grandiose constructions without considering debt repayment, Dong said.

To rein in local debt, the National Audit Office has suggested inclusion of debt risk in the performance evaluation of local officials. In its work report, the State Council has also proposed incorporation of local debts into budget management.

Meanwhile, the city of Jieyang in southern China’s Guangdong province has started carrying out credit ratings for the status of municipal economies, which will be a key reference point in the performance evaluation of local officials, the paper said. The credit rating will be downgraded whenever the scale of debt exceeds a certain level.

Cai Hongbin, a delegate of the National People’s Congress and dean of Peking University’s Guanghua School of Management, said the key for incurring debt is the value of investment projects and repayment capability rather than its scale.

Cai said that to help municipal governments wean off their reliance on debt-fueled spending, Beijing should supervise and audit debt incurrence, evaluate the propriety of municipal debts via a dynamic financial analytical system and credit rating system.

 

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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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