China’s top auditor warned about risks threatening the country’s economic development and called for better management of finances.  The auditor general at the National Audit Office (NAO) and China’s top auditor, Liu Jiayi, warned China’s politicians on Thursday that local governments must manage their debts and investments or risk derailing economic development.

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New Borrowing To Repay Old Debts

The auditor general observed debts owned by 18 provincial-level governments and municipalities have risen sharply touching 3.85 trillion yuan ($626 billion) by the end of last year. Debts have galloped by 13 percent over the past two years.

Liu Jiayi  highlighted that some governments have placed too much faith on land revenues and new borrowing to repay old debts. He cited as an example that about 45.4 billion yuan was raised through new debts to repay debts for constructing highways in 2012.

In his speech to the ongoing session of the Standing Committee of the National People’s Congress, the auditor general also revealed that some companies have blindly invested in various industries. About 45 projects without approval had invested 58.3 billion yuan by the end of 2011.

The audit report also stated that competitiveness between 53 central state-owned enterprises (SOEs) has significantly sharpened, while management still needs some improvement.

The report also revealed that the registration of 21 enterprises didn’t follow legal requirements. Over 1,780 key decisions made by the SOEs failed to meet standards, resulting in losses or potential losses amounting to 4.56 billion yuan ($741 million).

The auditor general’s report also disclosed sthat ome enterprises falsified sales volume or costs to either meet their quota or evade taxes. Forty-five projects were launched without adopting proper approval procedures.

The chief auditor’s report noted the discovery of 175 cases involving serious violations of economic regulations besides alleged commitment of economic crimes by over 630 people. Over 5,000 companies or organizations were involved in illegal online banking operations.

China Beginning To Show Some Cracks?

Recently, it has been reported China is trying to get itself out of a gigantic credit bubble. According to Fitch, for the last five years, the credit/GDP ratio has gone from 75 percent to 200 percent, a never-seen progression on the planet. In response to the 2008 crisis and to avoid a collapse of production, Chinese authorities vigorously intervened in the credit market in order to sustain real estate construction and infrastructures.

In a recent report titled ‘Heard in China’ published by IIFL Institutional Equities, its analyst Tiger Tong notes China’s failed attempt to soft land the economy from 4Q10 to 2Q12 has made the gap between funding cost and profit margins of the industrial sector reach a level where making further investment becomes less attractive. The report highlights that in 1Q2013, though average interest rates for bank loans was 7.2 percent (up from 6.1 percent in 2010), profit margins for the industrial sector have dropped significantly to 5.3 percent from 7.6 percent in 2010.