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China details $3 trillion local public debt risk

By Agencies - Jan 28,2014 - Last updated at Jan 28,2014

BEIJING — China’s local governments have published separate audit reports detailing their combined public debt of $3 trillion for the first time ever, to increase transparency and quell investor concerns.

The audits showed China’s wealthiest eastern provinces are the most indebted, though repayment burdens are more onerous in poorer areas such as the southwestern province of Guizhou, where the ratio of debt to gross domestic product (GDP) is the highest, at 79 per cent.

Most governments were shown repaying the vast majority of their debt on time, though a handful, such as Inner Mongolia, have fallen behind, with the portion of loans due but unpaid running as high as 28 per cent.

The burst of transparency follows criticisms from some experts this month that China was not releasing enough information about its local debt troubles, widely regarded by investors as the biggest threat to its $9.4-trillion economy.

“The issues are the most pertinent in the poorer parts of the country,” said Louis Kuijs, an economist at RBS in Hong Kong. “Those parts of the country have difficulty repaying their debt.”

Spurred by the need to sustain brisk growth in the world’s second-biggest economy, Chinese local governments have borrowed heavily over the years to fund non-lucrative public works such as sewage systems and railway lines.

Though some analysts welcome the public works and say China is right to build its infrastructure now before costs escalate as its economy grows, others worry that rapid investment has generated waste and sowed the seeds for bad loans.

Audit statements from 30 of China’s 31 local regions, provinces and municipalities showed the governments of Jiangsu, Guangdong and Sichuan are the three most indebted, with Jiangsu borrowing the most, at 1.5 trillion yuan. Tibet was the only region that did not release an audit report.

In terms of total debt as a portion of local GDP, however, Guizhou, Chongqing and Yunnan led the league.

The Beijing local government was at the top of the table in terms of money borrowed as a percentage of annual fiscal income at 100 per cent, followed by Chongqing’s 93 per cent and Guizhou’s 92 per cent.

Worrisome but
not a crisis

China released its most comprehensive audit of local government finances last month in response to mounting investor scepticism that its local debt problems are worse than official numbers suggest.

The report showed debt surging 67 per cent in two years, far more than officials had publicly admitted.

But analysts said it did not suggest China was on the verge of a crisis as total government debt is worth around 58 per cent of the economy, far from the levels of Greece and Japan, where public finances are strained.

Fears that China may suffer higher bad debt levels imperilling its financial system were compounded in the past two years by its cooling economy, where growth narrowly missed a 14-year-low forecast in 2013.

The audit reports showed a handful of governments were struggling to repay some loans. Inner Mongolia seemed to be under the most strain, with overdue loans that have not been paid making up 28 per cent of total debt.

The governments in Gansu, Shandong, Shanxi and Jiangxi also reported that unpaid loans accounted for between 8 and 10 per cent of total debt.

Standard & Poor’s expects 30 per cent of bank loans to local Chinese governments to sour if borrowers are not aided by other authorities, the rating agency said in a report last week.

“Nonetheless, we don’t see an imminent risk of a systemic crisis from local government debt,” it added, noting that China’s banks are buffered by strong profit growth.

Separately, China’s foreign exchange reserves, already the world’s largest, reached $3.82 trillion yuan at the end of 2013, the central bank pointed out, a new record.

The end-of-year figure was up from the $3.66 trillion as of the end of September, according to data published by the People’s Bank of China (PBoC).

It came after the country’s trade surplus reached $259.75 billion last year, up 12.8 per cent on 2012 and its highest since the global financial crisis.

Growth in China’s vast reserves has been fuelled by years of huge trade surpluses as the country has grown to become the world’s second-largest economy.

The surpluses have caused friction with China’s rivals in the West, headed by Washington, which says Beijing keeps its yuan currency artificially low in order to make its goods cheaper overseas and give exporters an unfair advantage.

But the rate of growth of China’s reserves has slowed in recent years as the once-booming economy is hit by troubles in the key export markets of Europe and the United States, while the yuan has been steadily strengthening against the dollar.

Analysts attributed some of the 2013 surge to speculative capital inflows, sometimes disguised as exports or foreign direct investment.

“We reckon hot money inflow pressures could be still strong at the moment,” Bank of America Merrill Lynch economists said in a research note, citing China’s rising interest rates, the rise of the yuan and confidence in the currency’s strength despite the tapering of the US stimulus.

Chinese leaders have repeatedly said they want to transform the economy to one in which domestic demand is the key growth driver, rather than public investment and exports.

But the daunting task looks set to be a long and arduous process.

The central bank said Chinese lenders extended a total of 8.89 trillion yuan ($1.47 trillion) in new loans last year, 687.9 billion yuan more than in 2012 and surpassing the reported official target of 8.5 trillion yuan set at the start of 2013.

In December alone, banks granted 482.5 billion yuan in new loans, down from 624.6 billion yuan a month ago, according to a PBoC statement.

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