Why a New Debt Report Has Some Chinese Leaders Worried

BEIJING (TheBlaze/AP) – China may be one of the United States’ top creditors, but that doesn’t mean the country is exempt from having debt issues of its own.

President Xi Jinping (image source: Getty Images)

In fact, China’s local government debt has increased by approximately 70 percent over the past three years, according to an official audit Monday.

Local governments owe directly or have guaranteed 17.7 trillion yuan (roughly $2.9 trillion) in debts as of June, the National Audit Office reported.

That’s up from nearly $1.7 trillion at the end of 2010.

The report, which follows warnings rising debt could endanger China's economic growth, has prompted Communist Party leaders to pledge to make getting debts under control an official priority.

The audit advises that local leaders find a way to reduce the alarming increase.

Debt still is "rising relatively fast," the report said. It said local leaders need to tighten control over borrowing and create an "emergency response mechanism" for their stock of debt.

The Chinese central bank has tried to allay concern, saying debt risks are manageable. But private sector economists say the rapid increase is dangerous for the financial system.

The audit was ordered in July by the new government under President Xi Jinping, which took power in March.

In a statement last month following an annual planning meeting, ruling party leaders promised to make resolving local government debts an "important task."

Chinese leaders are in the midst of a marathon effort to reduce reliance on trade and debt-fueled investment to drive economic growth. They are trying to shift to more sustainable growth supported by domestic consumption. But household spending is rising more slowly than planned, which has forced Beijing to prop up growth with spending on railway construction and other projects.

With central government borrowing added in, China's total official debt stood at $4.9 trillion as of June 30, according to the audit report at least. True, this pales in comparison to U.S. debt, but the rapid increase in local government debt still has analysts worried.

A big share of the debt stems from spending on new airports and other public works as part of Beijing's stimulus that supposedly helped China rebound from the 2008 financial crisis.

While Western governments borrowed directly to pay for their stimulus, China's debt was concealed temporarily on the books of state banks. Analysts have warned the rapid increase in lending could lead to a rise in unpaid loans.

Local governments also borrow to pay for schools and other social programs that are promised but not paid for by the central government.

The total debt burden was obscured because local governments created separate investment agencies to pay for construction of highways and other infrastructure. Some have run into trouble raising revenues to repay lenders.

Monday's audit report also cited problems including high debts for local industry, heavy reliance by local leaders on land sales to raise revenue and improper activities surrounding some government debt.

Auditors found some $2.2 billion that was improperly invested in stocks and real estate or spent on unauthorized construction, the report said. It said 69 people were implicated but gave no other details.

The Associated Press contributed to this report.

--

Follow Becket Adams (@BecketAdams) on Twitter

Featured image ChinaFotoPress via Getty Images.

[related]