China’s broadest audit of local government debt in two years showed borrowing swelled to 17.9 trillion yuan (US$2.95 trillion) as of June, underscoring financial risks in the world’s second-biggest economy.
The number for total liabilities, released in a statement on the National Audit Office Web site yesterday, rose about 67 percent from a previous estimate of 10.7 trillion yuan at the end of 2010.
China’s lending spree in recent years has evoked comparisons to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decades. The audit will help Communist Party leaders to judge risks in the financial system as they roll out economic-policy reforms decided at a meeting in Beijing last month.
“It is a very sizable build up and it’s the kind of build up that is not sustainable,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group PLC in Hong Kong, who previously worked at the World Bank. “It’s expanding at much too rapid a rate.”
The 17.9 trillion yuan total includes 4.3 trillion yuan of “contingent” liabilities, where local governments wouldn’t legally be obliged to make repayments, the audit office said.
“China’s government debt risks are under control in general, but there are potential risks at some places,” the office said.
Regional governments set up more than 10,000 local financing units to fund construction projects after they were barred from directly issuing bonds under a 1994 budget law. The State Council in July ordered a nationwide review of local-government debt.
Former finance minister Xiang Huaicheng (項懷誠) said in April the amount may be more than 20 trillion yuan and Nomura Holdings Inc in September estimated 19 trillion yuan as of the end of last year. Lou Jiwei (樓繼偉), the current finance minister, in September called the scale of local-government debt controllable and said the risk of default was “not great.”