Business

Chinese economy threatened by local government debt

Katie Allen

Report shows that local governments owe almost R31.6-trillion.

Fears about China's rising debts intensify

Fears about China's rising debts have intensified after a long-awaited report showed local governments owe almost R31.6-trillion.

Authorities' debts are up almost 70% since the end of 2010, according to wide-ranging research from the country's national audit office.

The report was ordered in July last year amid concern that the available figures failed to show how far thousands of local councils and state-owned businesses in the world's second biggest economy had overstretched themselves.

Audit office agents were sent across China to report on the finances of 36 000 local governments. They put the total outstanding debt at R31.6-trillion as of the end of June last year.

That marked a rise of 67% on the total arrived at after a less comprehensive audit in 2011.

The debt mountain was near the mid-point of market forecasts and was therefore below the most pessimistic predictions for debt of £42-trillion.

Finding won't calm investors
But the finding will do little to calm those investors and analysts who fear China's myriad local and state enterprises have been racking up debts to accelerate production rather than growing sustainably.

Economists said the new Communist Party leadership now face a balancing act of trying to temper local government borrowing without denting an already cooling economy.

The local government tally takes China's total government debt to about 58% of gross domestic product (GDP), higher than previously thought by many economists.

Credit rating agency Fitch, which cut China's long-term local currency rating to A-plus from AA-minus in April, estimated then that government debt was 49% of GDP.

But at 58%, the debt burden is still less than half that in crisis-stricken Greece and well below the United Kingdom, whose gross government debt is estimated at 92% for 2013 by the International Monetary Fund. The IMF's estimate for China is 23%.

Still, with debt rising and local government borrowing seen as one of the biggest threats to the economy, analysts warned that the new government, which took over in 2012, needed to accelerate its reform programme.

"While China's total government debt remains low by the OECD [Organisation for Economic Co-operation and Development] standards, the pace of the rise is still alarming," ANZ economists Liu Li-Gang and Zhou Hao said, referring to the OECD group of countries where average government debt is estimated at 110%. — © Guardian News & Media

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