China to Finish Debt Audit Ahead of Key Meeting

China will this month complete an audit of local-government debt to assess risks to its financial system, ahead of a Communist Party meeting in November to set economic policy, a government official said.

China’s finance ministry will wrap up its first full audit in more than two years in September and release the results in October, Vice Finance Minister Zhu Guangyao said yesterday at a briefing during the Group of 20 Summit in St. Petersburg, Russia. The total volume of debt is expected to rise slightly, he said.

China in July ordered a nationwide review of local-government debt, which the National Audit Office said in 2011 totaled 10.7 trillion yuan ($1.75 trillion). Former Finance Minister Xiang Huaicheng said in April the amount may be more than 20 trillion yuan, underscoring the risks President Xi Jinping’s government faces as the economy slows and it tackles the effects to the financial system of a record credit boom.

“The loans to local-government financing corporations are mainly used for infrastructure projects which have a relatively sound financial return,” Zhu said through an interpreter. “But indeed there are some projects, the so-called image projects, by local governments which have very little financial return and virtually no social benefits.”

The volume of local-government debt stood at 10.7 trillion yuan at the end of 2010, Zhu said yesterday, citing an audit done that year. The second round of audits this year may see the total volume rise “a little bit,” he said.

LGFV Debt

Local Chinese governments have also set up thousands of companies to sidestep regulations that bar them from directly borrowing from banks or selling debt. These financing vehicles were used to raise funding for construction of infrastructure such as roads and sewage systems.

Outstanding loans by the banking system to these local-government financing vehicles totaled 9.59 trillion yuan at the end of June this year, with a bad loan ratio of 0.14 percent, Zhu said.

The scale of local-government debt in the world’s second largest economy is controllable and risk of default not high, Finance Minister Lou Jiwei said in an interview aired by state broadcaster China Central Television on Sept. 4.

The lack of transparency in local-government borrowings prompted Fitch Ratings Ltd. to cut China’s long-term local-currency debt rating in April.

The Beijing plenary meeting of the party’s Central Committee, which includes Xi, Premier Li Keqiang, government ministers and heads of the biggest state-owned enterprises and banks, will discuss deepening policy reforms at a meeting in November, according to a report on Aug. 27 from the state-run Xinhua News Agency.

Zhu also told reporters that the U.S. should limit global risks from shifts in monetary policy, as an exit from easing poses a major challenge for the world economy.

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net; Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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