Opinion | Mounting local government debt a crisis in the making in China
Hu Shuli says authorities must rein in credit creation, audit the accounts and require more transparency in an overhaul of the regulatory regime
Warning of local governments' high exposure to bad debts, credit agency Fitch recently downgraded China's long-term local-currency rating from AA-minus to A-plus. Chinese officials should take note: the downgrade underlines how closely international markets are watching developments in China.
Local government debt is nothing new, but the amount had been modest - until recently. The government injection in 2008 of a 4 trillion yuan (about HK$4.5 trillion at exchange rates then) stimulus package has pushed debt levels sky-high. The continuing growth of the shadow banking system is also a source of hidden risk.
Just how big is the debt? According to the National Audit Office, local governments had 10.7 trillion yuan of debt at the end of 2010. The National People's Congress budget report, meanwhile, said principal repayment of local government bonds last year totalled 200 billion yuan. Some experts estimated a rise last year of 1-2 trillion yuan. Even based on conservative estimates, local government debt may now exceed 12 trillion yuan.
This debt is worrying not only because of its size. Worse, it is not transparent and we don't know how it will be handled. Of particular concern is the tendency of Chinese officials to let political expediency override economic sense.
The extent of the risk from local government debt has been a topic of hot debate. It is hard to tell when, where and how it could destabilise the system, given the opacity of government operations. Some analysts are worried about the sluggish growth of government revenues. Meanwhile, many people both in and outside the government believe the risk of default is low because the central government would pick up the pieces if things go wrong.
This view is mistaken. The central government is not obliged to guarantee local government debt.
