Bloomberg News

China Debt Swelling Adds Urgency to Xi’s Fiscal Repair Job (1)

December 30, 2013

Shenzhen Civic Center

People walk through the Shenzhen Civic Center in Shenzhen. Photographer: Brent Lewin/Bloomberg

China’s local-government debt swelled to 17.9 trillion yuan ($2.95 trillion), underscoring risks to the financial system as President Xi Jinping rolls out economic reforms.

Debt including contingent liabilities rose about 13 percent in the six months through June, based on figures in a report by the National Audit Office, posted on its website yesterday. That followed a 48 percent increase over the previous two years.

China’s borrowing spree in recent years has evoked comparisons to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decades. The audit result adds pressure for Xi, yesterday named head of a Communist Party leading group for reform, to repair a fiscal system that starves local governments of tax revenue.

“It is a very sizable build-up and it’s the kind of build-up that is not sustainable,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who previously worked at the World Bank. “It’s expanding at much too rapid a rate.”

The Shanghai Composite Index rose 0.1 percent as of 10:01 a.m. local time. The gauge has fallen more than 7 percent this year on concern an economic slowdown and higher money-market rates will weigh on corporate profits.

The 17.9 trillion yuan total includes 4.3 trillion yuan of contingent liabilities, where local governments wouldn’t legally be obliged to make repayments, the audit office said. The study covered 62,215 government agencies, more than double the number in the previous report, published in 2011.

‘Potential Risks’

“China’s government-debt risks are under control in general, but there are potential risks at some places,” the audit office said.

China’s local governments are responsible for 80 percent of spending while getting about 40 percent of tax revenue, according to the World Bank. Regional governments set up more than 10,000 local financing units to fund construction projects after they were barred from directly issuing bonds.

Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said that the numbers in the latest audit were “manageable.” Wang Tao, chief China economist at UBS AG in Hong Kong, echoed that view, while adding that the pace of accumulation of debt in recent years has been “too fast and is not sustainable.”

Japan’s Fate

Avoiding a fate akin to Japan’s growth collapse of the 1990s hinges on Chinese officials’ ability to reduce debt and shift policy, JPMorgan Chase & Co. said in a report this year.

China’s leaders pledged this month to tackle local-government debt “as an important task.” Local governments will be able to sell bonds to fund construction and officials will be rated on measures including borrowing levels, the party said last month, after a meeting to chart economic policy for coming years.

Policy makers need to put a reduced emphasis on economic-growth targets, shift some spending requirements from central to local governments, and boost local revenues, according to Wang, of UBS.

The audit-office report showed 10.9 trillion yuan of direct local-government debt as of June, with 22.9 percent of that amount due in the second half of this year. The direct local borrowing mainly related to municipal and county-level governments, which accounted for 44.5 percent and 36.4 percent of the total respectively. Provincial-level debt was 16.3 percent.

Credit Guarantees

Beside direct debt and contingent liabilities, the 17.9 trillion yuan total included credit guaranteed by local authorities, which amounted to 2.7 trillion yuan.

In September, Finance Minister Lou Jiwei called the scale of local-government debt controllable and said the risk of default was “not great.”

The audit report showed the total debt for central and local governments was 30.3 trillion yuan at the end of June. Of 19.1 trillion yuan of direct central and local debt owing at the end of 2012, 5.38 percent was overdue, according to the audit office.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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