China says local government debt soars

China today announced the results of a long-awaited debt audit, revealing that liabilities carried by local governments ballooned to 17.9 trillion yuan (USD 2.95 trillion) as of the end of June.
The figure, released by the National Audit Office in a statement on its website, compared with 10.7 trillion yuan as of the end of 2010 -- an increase of 67 per cent.
Concerns have grown at the amount of debt in the country and its potential impact on the world's second-largest economy, and Beijing embarked on the audit in late July.
Disquiet centres on borrowing by local authorities, which have long used debt to fuel growth in their regions, often by pursuing projects that are not economically viable or sustainable.

China's debt problem is considered to be a serious potential drag on its economy unless steps are taken to rein it in.
The local government debt burden was generally in line with economist estimates, if slightly higher, including one made in early October by Bank of America Merrill Lynch of 17.2 trillion yuan.

"We believe the markets and the Chinese government should be alarmed by the rapidly rising leverage, but we do not believe China is on the brink of a debt crisis, especially if the new leaders can take decisive measures to arrest its rising leverage," Lu Ting, economist at Bank of America Merrill Lynch in Hong Kong, said in a note.

Lu cited the central government's "very low" ratio of debt to gross domestic product (GDP) at 21 per cent.
Since almost all government debt is denominated in China's own currency and owned domestically, "the People's Bank of China (central bank) can prevent a public debt crisis with its unlimited capability for liquidity supply", he said.
He added that China is protected by a trove of national savings which include USD 3.5 trillion in foreign exchange reserves, its central and local governments' own solid assets, and the country's still-high economic and fiscal revenue growth.
The National Audit Office also said that direct government liabilities at both central and local level came to 20.7 trillion won as of the end of June.

That figure amounts to 40 per cent of China's GDP, according to economists Liu Li-Gang and Zhou Hao at ANZ bank.
But if contingent liabilities are included, the amount would exceed 30 trillion yuan, they said, adding the total would be equal to as much as 55 per cent of GDP.
"It is worth noting that this is the first time China is releasing total government debt figures," they said in a report.