China’s local governments are carrying total debt of nearly $3-trillion, data released on Monday revealed, a load that is smaller than the most dire market forecast but which still shows fiscal stresses are a key source of risk.
The National Audit Office, China’s state auditor, said in a report that local governments had total outstanding debt of 17.9 trillion yuan ($2.95-trillion) at the end of June. It said the figure includes contingent liabilities and debt guarantees.
The debt total is the first China has reported since 2010, the last time it did a comprehensive audit of its state finances. At that time, the audit office put cumulative local-government debt at 10.7 trillion yuan, so the new figure is 67 per cent larger.
Including debt owed by the central government, China’s total government debt amounts to 58 per cent of its $8.5-trillion economy.
China’s mountain of local government debt is among the biggest threats to the world’s No. 2 economy as investors are worried a substantial part of it cannot be repaid since most of the money borrowed had paid for non-lucrative public infrastructure.
Prior to Monday’s announcement, the most pessimistic market estimates of what local governments owe have been close to 25 trillion yuan, or 40 per cent more than 17.9 trillion yuan. However, the figure given on Monday is larger than the estimates by some foreign banks.
Monday’s report may increase calls for authorities to contain local-government debt and strengthen China’s finances.
“We expect the government to unveil detailed plans for fiscal reform,” said Shen Jianguang, an economist with Minzhuo Securities in Hong Kong.
“The key to solving the debt (problem) depends on changing the distribution system for fiscal income between central and local governments, as well as (changing) local governments’ over-reliance on land sale revenues.” Shen said.
Poor government disclosure on debt levels have further aggravated concerns about the true size of China’s bad debt risks.
At the time it cut China’s sovereign debt-rating in April, Fitch Ratings predicted that local government debt stood at 25 per cent of GDP, or $2.1-trillion.