China orders audit of local govt debt as growth risks rise

Weighed down by mounting debt, China has ordered a countrywide audit of local government liabilities, underlining fears that the slowdown in the world's second biggest economy may impact its financial stability.
The announcement came amid reports that Chinese cabinet has made the audit campaign one of its "urgent" tasks and that all government auditors are being given crash training to start the work early next week.
Their work is expected to update China's local government debt figures, which stood at 10.7 trillion yuan (USD 1.75 trillion) by the end of 2010. By comparison, China's GDP was close to 52 trillion yuan (USD 8.5 trillion in 2012).

Jiang Chao, chief analyst of the debt market with Haitong Securities, estimated that the amount of local government debt was around 15 trillion yuan (about USD 2.4 trillion) which including 9.5 trillion yuan in loans, three trillion yuan in trust funds, two trillion yuan in city investment bonds and 0.65 trillion yuan in local government bonds.
According to state-run China Daily, Jiang warned that infrastructure investment might stall if financing via trust funds is halted, as the investment is mainly supported by off-balance sheet borrowings.
An estimate by the IMF last month put China's total government liability, including government-led infrastructure development projects, in excess of 45 per cent of the country's GDP.

The move aims to "find out how exactly local governments are indebted so as to effectively prevent risks from building up," said Xu Hongcai, a senior economist under the China Centre for International Economic Exchanges, a government think tank.

"The possibility of a debt crisis cannot be excluded," Xu said, adding that should a crisis break out, it would trigger massive levels of bad debt at banks with the resultant burden being taken on by all taxpayers.
Unlike the central government's debt information, information as to local administrators' liabilities remains opaque.
Compared with previous audits on this scale, the National Audit Office has added lower-level government targets, such as township governments, to its list, Global Times quoted Jiang Chao, chief bond analyst at Haitong Securities as saying.

The decision also signals that local government liabilities linked with the property sector and shadow banking are generating risks hindering economic growth, Li Youhuan, a senior economist with the Guangdong Academy of Social Sciences told the newspaper.
Li warned that local administration debt was the second riskiest factor, behind real estate, for a potential financial crisis in China.