China Local Government Debt Level Surges To $3 Trillion

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China’s National Audit Office reported that the total debt of the local governments surged to almost 17.89 trillion renminbi or $3 trillion by the end of June.

According to the central auditing agency, the figure increased by 12.7% from the local governments’ total debt obligations of 15.88 trillion renminbi in December last year. The amount also represents a 67% increase compared to the 10.71 trillion renminbi total local government debts by the end of 2010.

Separate report estimates debt at $3.3 trillion

Last week, a separate report from the Chinese Academy of Social Sciences, research firm linked to the government estimated that the local government debt in the country was around $3.3 trillion.

Over the past five years, the local governments from municipal, county, and provincial levels in the country kept borrowing to finance different projects, particularly real estate and infrastructure developments to boost economic growth. Analysts are concerned that the locals may not be able obtain enough returns from those investment to repay the entire debt.

Analysts concerned with China’s debt situation

In June, analysts and economists opined that China’s bad corporate and local government debts have reached to an alarming levels. Back then, Societe General economist Wei Yao noted that the debts were above the 120 percent of annual economic output,  a level considered alarming. Yao warned that the situation could lead to an economic slowdown or a Japan-like collapse followed by a long-term recession.

Given the warnings, the National Audit Office launched an investigation regarding the debts of local governments in July. The national audit agency deployed 54,000 auditors to evaluate all the books of more than 672,000 government institutions and departments. The auditors reviewed 3.4 million debt financing related to over 700,000 projects.

According to the national audit  agency, the local governments established a special purpose financing vehicle to borrow funds for certain projects. In China, local governments are no allowed to obtain loan or issue bonds directly. Based on the report of the National Audit Office, 40% or 6.96 trillion renminbi of the total local government debts were incurred through the special purpose financing vehicles

The National Audit Office also reported that China’s total government debt was 30.27 trillion renminbi by the end of  June. The figure is higher than the 27.77 trillion renminbi in December last year.

Based on the report of the national audit agency, Lu Ting, economist at Bank of America Merrill Lynch in China estimated that the country’s total public debt is approximately 53% of its gross domestic product (GDP).  According to him, if he would add the corporate and household debts, China’s total debt ratio will be 190% of its GDP.

“We believe the markets and the Chinese government should be alarmed by the rapidly rising leverage, but we do not believe China is on the brink of a debt crisis, especially if the new leaders can take decisive measures to arrest its rising leverage,” commented Lu.

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