Local Government Debts: Beijing seeks the big Picture

New bosses usually want to know the status they’ve inherited. The new collective leadership around Xi Jinping is no exception: the state auditing administration, in accordance with the demands of the state council, is going to arrange a national audit concerning governmental debt. The focus is on local governments, according to Economic Reference ( 经济参考报, via Enorth):

The “black hole” of local government debt has triggered the vigilance of the center. Experts believe that illegal financing by local governments will be in the audit’s focus, and that the audit will include the financial situations of township and village governments.

“近日，根据国务院要求，审计署将组织全国审计机关对政府性债务进行审计。”国家审计署网站28日挂出的一条短消息，瞬间传遍市场，释放出强烈的信号———地方政府债务“黑洞”已经引发中央高度警觉。专家认为，地方政府的违规融资行为将是此次审计的重点，同时乡村一级政府债务情况也有望纳入审计。

This would include the debts/repayables of local investment platform companies (地方融资平台公司), says the article – however, this wasn’t the first audit of this kind. From March to May 2011, the state auditing administration had examined 31 provincial governments (including autonomous regions and municipalities) as well as five state-planned and administration levels within city-level. As of the end of 2010, with the exception of 54 county governments with no debts, provincial, city and county-level governments had accumulated 10.7 trillion Yuan RMB of debts (10,700,000,000,000).

After that, no nation-wide audits had been carried out, however, 36 local governments and their sub-levels had been examined from November 2012 to February 2013.

The article also quotes an IMF estimate as saying that Chinese government debt in its broad sense (including the central government’s and local governments’ spending on infrastructure which wasn’t included in governmental (official) budgets would already exceed 45 percent of GDP.

Other sources quoted put the percentage even higher, such as 78 percent by the end of 2012, according to a report by the Standard Chartered Bank, but despite many estimates abroad and at home, there were no official, authoritative statistics yet.

The article quotes a number of experts with their assessments, and a person close to the ministry of finance. The latter is quoted as saying that “in some counties and counties, the problem of government finance and government debts is very serious and has to be taken seriously.”

It’s a fairly candid article, and it is in line with generally more sober reports on the state of the economy, but it is strictly focused on pointing out what needs to be done, and carefully avoids any “doom-and-gloom” scenarios of the kind which would hardly be missing in a European description of either a Chinese or a European mess. The article also avoids pointing out the central government’s responsibility for the ambiguous financial status of lower government levels.

In the wake of the global financial crisis since 2008, stimulus programs – particularly investment in infrastructure – had been China’s answer to slowing global demand for Chinese products. Reportedly, the central government decided on the stimulus, but most of the investments actually had to be made (and financed) by local governments, and they were carried out by provincial or locally-owned investment companies.

As early as in March 2010, Victor Shih (Northwestern University), who apparently dug comparatively deep into the issue at the time, foresaw no Chinese financial crisis, but a costly process to restructure and recapitalize the banks.

That process is now in its infancy – and it is hard to tell if it will even manage to depict the as-is status accurately. The CCP is facing a number of options or necessities beyond financial restructuring, too, which might look like this, more or less. It won’t just be a matter of financial restructuring, but a matter of restructuring the economy: in the long run, misallocated capital can’t come cheaply.

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» Who will bear the Costs, July 7, 2013

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