China Rethinks GDP Obsession as Local Debt Risks Rise

Is China ready finally to break the debt addiction of its local governments? Chinese officials are now suggesting that’s a top priority.

GDP growth will no longer be the yardstick for appraising local officials’ success. Promotions will now be dependent on success managing finances and debt, announced the Organization Department of the Chinese Communist Party in a document issued Dec. 9.

Also important: pursuing more balanced local development. That includes strengthening social welfare provisions, such as medical services, education, and pensions for citizens. It also means ensuring that environmental emissions are contained and that energy is used more carefully.

The new system will give “greater emphasis to indices related to the waste of resources, environmental protection, excess capacity and production safety. Evaluation of scientific innovation, education, culture, employment, social insurance and health should all be encouraged,” the document states, reported the official Xinhua News Agency on Dec. 11. “Local government debt will become an important measure of performance, as will transparent auditing of how loans are raised.”

“Local governments’ pursuit of the overarching economic growth imperative produced a surge in local level liabilities that are largely responsible for the increase in central and local government debt,” says a Dec. 12 credit outlook by Moody’s Investors Service. Under the new rules, “reduced incentives to promote economic growth at all costs will instill fiscal discipline and curb the rapid rise in contingent, quasi-government debt.”

All sounds good indeed. Still, even as local governments have been ordered to shift their priorities, one might be forgiven for wondering just how big the pile of debt has already grown. That’s hard to know, with much of it held in murky abeyance by so-called local government finance vehicles, set up by cities and towns in recent years to circumvent restrictions on direct borrowing.

The last nationwide survey found that debt held by the local finance vehicles totaled 10.7 trillion yuan ($1.8 trillion) as of the end of 2010, or 27 percent of China’s economy. China’s investment splurge of recent years has likely driven that figure much higher. Local government debt may now exceed 20 trillion yuan, estimated China’s former finance minister, Xiang Huaicheng, in April.

Back in the summer, China’s State Council ordered the National Audit Office to do a new survey of local debt, with many at the time expecting the results to be announced before November’s third plenum. That didn’t happen. Now some are wondering whether Beijing has decided the latest audit numbers are too scary for public consumption.

Before it's here, it's on the Bloomberg Terminal.