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July 31, 2013

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Home » Opinion » Chinese Views

Big local debt sounds alarm for urbanization

Source: Xinhua | July 31, 2013, Wednesday | Print Edition

A FORTHCOMING audit of overall government debt in China is expected to reveal the state of growing government indebtedness and its potential risks during the country’s economic slowdown.

The last audit conducted by the National Audit Office found liabilities of 3.85 trillion yuan (US$624 billion) owed by 36 local governments, including Shanghai, Tianjin and Chongqing municipalities, by the end of 2012.

That debt was 12.94 percent higher than that at the end of 2010, when the combined debt of the 36 local governments accounted for 31.79 percent of the 10.7 trillion yuan in total local government debt at that time.

A large part of local government debt has been spent on urban construction, and the worries and pressures of a county-level finance official can shed some light on the situation.

The deputy head of the finance bureau of a county in central China’s Hubei Province said the county government would ask the bureau to raise funds for infrastructure projects.

But insufficient funds forced the bureau to take out bank loans. Later, due to difficulties and the long bank approval process, the bureau resorted to raising private funds, said the local official who declined to be identified by name.

The interest on the debts alone created great pressure. “Our repayment abilities are very poor, but the debts are increasing, just like a huge mountain. I fear there will be a breakdown someday,” he said.

In a new zone under construction in Xi’an, capital of northwest China’s Shaanxi Province, infrastructure construction relies on bank loans. The zone borrowed nearly 2 billion yuan from banks in 2012, with part of the loans taken out at a yearly interest rate of 12 percent. The short-term, high-interest loans posed a heavy financial burden on the local government.

“Local financing is a systematic problem caused by the GDP-oriented mindset of officials, poor fund management and other factors,” according to Sun Lijian, deputy head of the School of Economics at Fudan University in Shanghai.

The US city of Detroit’s recent move to file bankruptcy sounded the alarm for China.

“In fact, there are Chinese cities with development similar to Detroit. Though they will not go bankrupt, they face the pains of development and transformation,” said Sun.

Sun suggested that the key to the issue lies in preventing acts of reckless investment by local governments and empowering them through the development of competitive industries.

Funding gaps

The government debt problem has raised concerns about the country’s urbanization process.

Hu Dongsheng, an official with China Development Bank, said in April that China faces a fund gap of about 11.7 trillion yuan for construction related to urbanization in the next three years.

The enormous investment needed for urbanization has called for the introduction of more private and foreign capital, and the central and local governments should lower the threshold in this respect, said Hong Hao, a researcher at Central University of Finance and Economics in Beijing.

Private funds have become a major funding source for urbanization for townships in some regions, especially for projects such as drainage and sewage treatment, said a township head in Hubei Province.

The news of government debt audit has sparked concerns about rising debt levels.

On Monday, the benchmark Shanghai Composite Index decreased 1.72 percent, or 34.54 points, while the Shenzhen Component Index lost 2.23 percent, or 174.83 points.

“The market needs overall and precise official data about local government debts. Otherwise, opaque information is unfavorable to stabilize market expectations,” said Pan Xiangdong, chief economist with Galaxy Securities.

 

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