Sudden debt

China: One of China's biggest economic unknowns has finally been quantified. China’s local governments owe 10.7 trillion yuan ($1.6 trillion), says a National Audit Office report released on June 27. The figure is likely to be on the low side. Yet, it still speaks volumes about China's headlong pursuit of growth.

The new number may be a good first stab. But it isn't conclusive and jars with previous estimates. Take the special financing vehicles set up to fund infrastructure projects.

The audit bureau probed 6,575 of these, and found 4.9 trillion yuan of debt. The People’s Bank of China has counted some 10,000, with up to 14.4 trillion yuan of debt. Taxonomic differences aside, the audit bureau's report looks partial: it doesn't include loans to state-owned enterprises, for example, though many of those borrowings may have been taken out at local authorities' behest.

On the audit board’s numbers, local government debt alone won’t cause the banks to collapse. China's biggest nine banks are expected to make around 2 trillion yuan in earnings over the coming three years. That would be enough to absorb — with discomfort — a scenario where a quarter of the government loans coming due before 2015 go bad with no recovery.

But there’s a strong impression here of an economy run amok. Rule-bending appears systemic: half the debt total came from outside of the special vehicles, though these were meant to be governments’ only way to borrow directly. Over half of loans in some areas, like motorway construction, were simply rolled over when repayment came due. Meanwhile, a recent ban on borrowing didn’t stop governments from securing a further 1.9 trillion yuan of lending in return for guarantees.

Further borrowing is now effectively on hold, and the central government looks likely to backstop what's already out there. But that’s hardly an end to it. It is unclear how half-finished projects will be completed — or how much China’s rapid growth has been sustained by infrastructure projects with unstable, or unapproved, financing.

Putting a number on local government profligacy was presumably intended to draw a line under the matter. But as with most of China’s big numbers, it raises more questions than it answers.