China’s annual audit has reveled some of China’s provinces have serious debt problems. Liu Jiayi, head of the National Audit Office wrote in the report “The scale is large, and the burden is quite heavy”.
In 2008 when global demand for China’s products started to fall, the government, like many around the world embarked on a stimulus program to flight off recession. Much of this was undertaken by local government created companies or SOE (State owned enterprises) investing in infrastructure projects such as empty apartments and office towers. Earlier this year we reported that the central government had banned 78 SOE from making further investments in real estate.
The Telegraph reports that many of the Chinese provinces are large and equivalent to major European countries. It cites an example of the The southern province of Guangdong having the same population than Germany. Previously the budgets of provinces were state secrets and this is the first time the level of debt has been disclosed.
Northwestern University Professor, Victor Shih believes the total sum of local government debt in China could be 11.4 trillion yuan or equivalent of 71 percent of China’s nominal GDP. He has researched more than 8,000 state owned local investment companies concluding that orders to ramp up spending on infrastructure after the GFC could leave China with widespread debt problems.
According to China’s banking regulator, outstanding loans to local government financing vehicles soared 70 percent last year hitting 7.38 trillion yuan at the end of 2009. As infrastructure projects continue to burn cash with little return on investment, Mr Shih suggests China could be in for a “pretty large-scale financial crisis around 2012” if nothing is done to address the issue.
» China’s chief auditor warns mounting local government debt a risk to economy – The Telegraph, 24th June 2010.
» China auditor: local govt debts pose economy risk – Bloomberg, 24th June 2010.
People need to be aware that as China is not a democracy, whatever their government says may not be 100% correct. If they openly talk about excessive debt, I am certain the situation is worse then they are willing to admit. If China’s economy goes bang, then so does the Australian resource sector. Scary thought.