China published an audit of local government finances in response to fears of hidden debts. It revealed a total of RMB10.7trn ($1.66trn) in outstanding loans (around 27% of GDP). Other estimates that include connected loans without a formal guarantee suggest the total is higher, at around RMB15trn.
What the commentators said
“The main reason for the towering total is that municipalities were let off the financial leash following the [global financial] crisis,” said the FT. Half the debt was run up in 2009-2010, when banks were encouraged to lend to local government projects as part of a nationwide stimulus. This was an effective response to the crisis: China’s banks “proved better at shovelling money out the door than America’s federal government”, said The Economist. But its weaknesses have since become apparent. Many of the loans are of poor quality; only around a third of projects can service debts fully from internal cash flow, while the worst 20% are generating almost no cash, according to Caixin magazine.
If these extra liabilities are factored in, China’s government debt-to-GDP ratio is around 80% of GDP. That’s mostly in renminbi and held by domestic institutions, notes The Economist; hence a funding crisis is very unlikely. But Beijing must “get a grip… before this becomes a bigger problem”, says the FT. Allowing local governments to issue bonds, rather than using bank loans, would force them to be more transparent and responsible – a move that seems likely in the near term, says Qu Hongbin of HSBC.