IMF Says China Local Debt Concerns Shouldn’t Be Exaggerated

Concern about the scale of borrowing by China’s local governments shouldn’t be exaggerated because most of the debt is in local currency, said Changyong Rhee, Asia-Pacific director at International Monetary Fund.

“We are concerned; it’s a problem, but on the other hand don’t exaggerate it too much,” Rhee said at a briefing during IMF meetings in Washington today. “If necessary, there’s room for the Chinese government to react” to protect financial market stability, he said.

A 2008 stimulus package deployed amid the financial crisis and funded with off-balance-sheet lending added to the debt burden for local governments, raising concern they won’t be able to pay down borrowing. Their liabilities rose 67 percent to 17.9 trillion yuan ($2.9 trillion ) as of June 2013 from the end of 2010, according to National Audit Office data.

Chinese authorities understand the need to slow credit growth and are willing to “sacrifice” economic growth to “ensure their long-term stability,” Rhee said.

The IMF predicts China’s economic growth will slow to 7.5 percent this year, from an average growth rate of 10 percent over the past decade.

While the level of local government debt is still “manageable,” they need to slow the increase, Markus Rodlauer, deputy director of the Asia-Pacific department, said at the same briefing.

Local governments are responsible for 80 percent of spending while they get only about 40 percent of tax revenue, the legacy of a 1994 tax-sharing system, the World Bank said.

It is not “the right way” to remove the debt load from the local to central government in “one stroke” because it will create “moral hazard” and encourage local authorities to borrow even more, Rodlauer said.

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