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Tuesday, December 31, 2013

Chinese local authorities owe almost £1.8tn – report

National audit office figures reveal alarming levels of debt accrued by state governments and businesses

Fears about China's rising debts have intensified after a long-awaited report showed local governments owe almost $3tn (£1.8tn). Authorities' debts are up almost 70% since the end of 2010, according to wide-ranging research from the country's national audit office.

The report was ordered in July amid concern that the available figures failed to show how far thousands of local councils and state-owned businesses in the world's second biggest economy had overstretched themselves.

Audit office agents were sent across China to report on the finances of 36,000 local governments. They put the total outstanding debt at 18tn yuan (£1.8tn) as of the end of June. That marked a rise of 67% on the total arrived at after a less comprehensive audit in 2011.

The debt mountain was near the mid-point of market forecasts and so below the most pessimistic predictions for debt of £2.4tn. But the finding will do little to calm those investors and analysts who fear China's myriad local and state enterprises have been racking up debts to accelerate production rather than growing sustainably. Economists said the new Communist party leadership now faced a balancing act of trying to temper local government borrowing without denting an already cooling economy.

The local government tally takes China's total government debt to around 58% of GDP, higher than previously thought by many economists. Credit rating agency Fitch, which cut China's long-term local currency rating to A-plus from AA-minus in April, estimated then that government debt was 49% of GDP.

But at 58% the debt burden is still less than half that in crisis-stricken Greece and well below the UK, whose gross government debt is estimated at 92% for 2013 by the International Monetary Fund. The IMF's estimate for China is 23%.

Still, with debt rising and local government borrowing in particular seen as one of the biggest threats to the economy, analysts warned the new government that took over in 2012 needed to accelerate its reform programme.

"While China's total government debt remains low by the OECD standards, the pace of the rise is still alarming," ANZ economists Liu Li-Gang and Zhou Hao said in a research note, referring to the OECD group of countries where average government debt is estimated at 110%.

"This national debt audit result could indicate that China's local government debt almost doubled in about 2-1/2 years."

The NAO's finding that debts were much higher than in 2010 defied assurances from Beijing that local government debt levels had stabilised in recent years.

The state auditor highlighted risks such as heavy debt burdens in some unnamed regions and sectors as well and government dependence on land sales to repay loans.

"China's government debt risks are in general under control, but some areas have certain dangers," the report said.

Pan Xiangdong, chief economist at Galaxy Securities in Beijing predicted the central government would now restrict the borrowing behaviours of local governments.

"Although current overall risks of local government debt are under control, risks would definitely increase sharply if the debt continues to rise so quickly," he was quoted as saying by Reuters.

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