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State Researcher Says China Local Debt May Top 20 Trillion Yuan

Sept. 16 (Bloomberg) -- China’s audit of local government debt may find that provincial and municipal authorities owe more than 20 trillion yuan ($3.3 trillion), said Liu Yuhui, a researcher at the Chinese Academy of Social Sciences.

That would be “way higher” than the level of debt at the end of 2010, Liu said at a briefing in Beijing today to announce that the academy and China Credit Rating Co. will jointly develop credit ratings for the country’s local governments. China’s National Audit Office said in a 2011 report that local authorities owed 10.7 trillion yuan at the end of 2010.

The State Council, China’s cabinet, ordered a nationwide audit of local government debt in July on concerns that slowing economic growth may leave some authorities unable to repay borrowings. Local Chinese governments have sidestepped rules barring them from directly taking bank loans and selling bonds by setting up thousands of companies to do so instead, raising funds to build roads, bridges and sewage systems.

“Many local governments are under pressure from a capital shortfall as they need to fund public projects required for urbanization,” Liu said. China’s current system doesn’t meet their funding needs and as a result, “the issue of local government debt is in a situation of getting out of control.”

China this year expanded trials that began in 2011 to allow provinces and cities to directly sell bonds. The eastern provinces of Jiangsu and Shandong were added to the trial in July, joining the provinces of Zhejiang and Guangdong and the cities of Shanghai and Shenzhen.

Credit Ratings

The partnership to develop ratings marks a step forward in China’s preparation to allow local governments to sell debt, Chinese Academy of Social Sciences Vice President Li Yang said at the briefing today. China Credit Rating was set up in August 2010 by the National Association of Financial Institutional Investors, a body under China’s central bank that regulates the interbank bond market.

In April, Former Finance Minister Xiang Huaicheng also said that local Chinese government debt may be more than 20 trillion yuan. Xiang, who served as finance minister from 1998 to 2003, said the figure was based on his personal estimates.

Liu today said that his estimate was partly based on information from a friend at the China Banking Regulatory Commission. The audit of local debt will be completed this month, according to Vice Finance Minister Zhu Guangyao.

Lou Jiwei, who was named finance minister in March, said this month that the scale of local government debt was controllable and that the pace of borrowing was slowing. In an interview with state broadcaster China Central Television, Lou said that while some local governments face “relatively big” debt problems, the risk of default was “not great.”

“Some local governments are a bit tight but they haven’t turned into non-performing loans,” Wu Lizhi, deputy director general for treasury and financial markets at China Development Bank Corp., said at the briefing today.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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