Chinese Local Government Spending Spikes Debt

Source: http://www.flickr.com/photos/7964696@N05/

Source: http://www.flickr.com/photos/7964696@N05/

China’s local government debt increased to a staggering 17.9 trillion yuan ($2.95 trillion), according to a report by the country’s National Audit Office. The report, released Monday, shows an increase of 67 percent since the last audit was completed three years ago, The Wall Street Journal reports.

Economists worry that if multiple local governments across China have to borrow money, the entire financial system in China could need a bailout. The large, state-controlled banks would be hit particularly hard if borrowing rises and economic growth slows.

Numbers crunched by the publication place the overall debt for the country within 60 percent of gross domestic product, with China’s liabilities being 53.3 percent of its GDP. The 60 percent debt-to-GDP ratio is an internationally accepted standard and “represents a sound target for stabilizing the debt in the medium term,” according to the Committee for a Responsible Federal Budget.

Louis Kuijs, chief China economist at Royal Bank of Scotland Group in Hong Kong, told Bloomberg the ballooning of debt “is a very sizable build-up and it’s the kind of build-up that is not sustainable. It’s expanding at much too rapid a rate.”

The audit called attention to possible future problems. “China’s government debt risks are under control in general, but there are potential risks at some places,” the report said. Not everyone sees the increase as a cause of concern.

Ting Lu, an economist at Bank of America Merrill Lynch, has calculated China’s public debt as well, placing it at 53.3 percent of GDP. The Financial Times ran an excerpt of a note Lu wrote to clients about the fiscal state of China. “The markets and the Chinese government should be alarmed by the rapidly rising leverage,” Lu said. “But we do not believe China is on the brink of a debt crisis, especially if the new leaders can take decisive measures to arrest rising leverage.”

Arthur Kroeber of GK Dragonomics, a firm that researches and analyzes China, told the news outlet that the information released Monday was on par with estimates. “The number is pretty much in line with expectations,” Koreber said to the Financial Times. “The starting point in terms of managing it is stopping a new flow of local government debt.”

Also on Monday, China announced that President Xi Jinping will be in charge of a group for “overall reform” in the country. The group is tasked with ”designing reform on an overall basis, arranging and coordinating reform, pushing forward reform as a whole, and supervising the implementation of reform plans.”

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