China's chief auditor has warned that high levels of local government debt could derail the country's economy, with some observers suggesting that a number of Chinese provinces are even more fiscally-troubled than Greece.
China's chief auditor warns that mounting local government debts could be a threat to the economy. Visitors discuss in front of a model of a real estate development at a property fair in Beijing Photo: Reuters
Liu Jiayi, the head of China's National Audit Office said the financial crisis had left some Chinese provinces with serious debt problems.
"The scale is large, and the burden is quite heavy," he said, in an annual report to the Chinese government.
Chinese provinces are, in some cases, equivalent in size to major European countries and run with a degree of fiscal autonomy. The southern province of Guangdong, for example, has the same population size as Germany.
However, provincial budgets have been classified as state secrets until now and this is the first time that China has disclosed the level of local government debt.
Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc.
He said the audited debts of 18 of China's 22 provinces, together with 16 cities and 36 counties amounted to 2.79 trillion yuan (£279bn) in 2009.
Several observers believe the situation is far worse. The China Daily newspaper, which is run by the government, suggested that the total sum could add up to between 6 trillion and 11 trillion yuan (£590bn-£1.08 trillion).
Victor Shih, a professor at Northwestern University in the United States, believes the sum in 2009 was 11.4 trillion yuan, equivalent to 71pc of China's nominal GDP.
Mr Shih has warned that local governments have also succeeded in rapidly funnelling large amounts of debt off their balance sheet and into public-private investment vehicles.
China's banking regulator said outstanding loans from banks to local government financing vehicles was 7.38 trillion yuan at the end of 2009, rising 70pc year-on-year.
Mr Shih, who researched more than 8,000 of these "local investment companies", said that orders to ramp up spending on infrastructure after the financial crisis could leave China with widespread debt problems.
"I collected data from thousands of sources, including regulatory filings, bond-rating reports and press releases of government-bank agreements," he said, although he admitted that comprehensive data was difficult to track down.
Next year, he is forecasting government debt to hit 96pc of gross domestic product as infrastructure projects continue to eat up cash and produce negligible returns.
"The worst case is a pretty large-scale financial crisis around 2012," he said. "The slowdown would last two years and maybe longer," he added.
The US debt-to-GDP ratio is close to 90pc while Greece's is 130pc.
With Europe's debt problems in the spotlight, the Chinese government has moved to try to fix the problems in its provinces.
Earlier this month, the State Council, China's cabinet, ordered local governments to stop borrowing using special vehicles which rely solely on government income for their revenues and to shut down the public-private partnerships as soon as possible.
The State Council said local government vehicles had "in many cases illegally guaranteed the debt of those vehicles" and had "experienced some problems that demand urgent attention".
The government ordered a progress report to be completed by local governments by the end of the year.
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