China’s Cabinet has ordered an urgent nationwide audit of debts owed by local governments, reflecting unease about potential financial threats from unreported multibillion-dollar borrowing.
The order announced on Sunday by the Chinese National Audit Office in a one-sentence statement gave no details or a timeline, but the Chinese Communist Party’s main newspaper, the People’s Daily, said the Cabinet sent an “urgent message” ordering the audit and told local audit officials to suspend work on other projects until it is completed.
The rising debts of China’s city, county and other local governments have prompted concern about possible threats to the state-owned banking system if borrowers default.
Chinese Deputy Minister of Finance Zhu Guangyao (朱光耀) this month said the total amount of borrowing was unknown, but expressed confidence that the debt load was manageable.
Local governments face rising financial burdens to pay for schools, healthcare and other programs promised by Beijing, but most are barred from imposing their own taxes and have limited sources of financing. They therefore rely on land sales and bank loans.
Borrowing accelerated after the 2008 global crisis, when Beijing pumped money into the economy through higher spending on building subways and other public infrastructure projects. Many of these projects were financed by local governments with loans from state banks.
Local leaders also created finance agencies to pay for construction of highways and other infrastructure. Some of those entities have run into trouble raising revenue to repay their debts.
The National Audit Office reported last year that local governments ran up debts of 10.7 trillion yuan (US$1.6 trillion) over the past decade, which is equal to about one-quarter of China’s annual economic output.
“We admit candidly that we still face challenges,” Zhu said at a news conference on July 5. “We need to stay alert to the risks, but we also are confident in the general situation.”
China’s total debt is relatively low as a percentage of its economy, but some analysts warn the speed of increase in recent years could lead to problems.
“Further rapid growth of debts would raise the risk of a disorderly adjustment in local government spending,” the IMF said in a report earlier this month. “This would drag down growth, with adverse global spillovers.”