The Chinese government said Friday that it doesn’t know how much debt local governments are sitting on but warned the total is likely to be greater than the amount estimated in an audit conducted nearly three years ago.
Zhu Guangyao, a Vice-Minister of Finance, made the admission to reporters at a briefing warning that the total amount is larger than the CNY10.7 trillion that was acknowledged as part of an official audit taken at the end of 2010.
“Despite existing risks, the government needs to get clear the outstanding number of local government debt, the exact amount of it,” Zhu said.
Impact on infrastructure projects
Concerns have grown that the debts incurred could sour as many infrastructure projects in China are for public use and not profitable. Many local governments have also borrowed from companies in private arrangements at high cost, with the money often used in speculative real estate projects.
Level of debt in the China’s financial system
Zhu’s comments highlight the thorny issue of how much debt is hiding in the Chinese financial system. The People’s Bank of China recently moved to force banks to rein in lending practices which analysts believe have inflated debt to worrying levels in recent years.
China’s budget law forbids local governments from taking on debt directly, but localities have borrowed trillions through special-purpose vehicles known as local-government financing vehicles.
Zhu said Chinese banks have reported 9.54 trillion yuan in loans to local financing platforms.
Last month, Societe Generale economist Wei Yao reported that China’s debt reached an alarming level. According to him, the country’s corporate debt is 1.5 times the size of its economic output, and one third of Chinese firms are borrowing additional money to pay high interests on their existing liabilities.
Credit Rating Agencies view on China
Fitch cut its sovereign rating for China earlier this year, warning that total system-wide credit may have risen to just under 200 percent from 125 percent in 2008, aided by the rise of shadow banking that the authorities are struggling to control.
The government hasn’t published a nationwide audit of local government debt since the 2010 estimate, but a National Audit Office audit of 36 authorities published last month suggested total direct and guaranteed debt may have risen 13 percent percent to CNY12.1 trillion, according to Moody’s Investors Service.