According to an article published in the Wall Street Journal: "In the next few weeks, the Chinese government is expected to release the results of an ambitious effort to calculate a seemingly simple figure: just how much the country's local governments have borrowed from banks and investors in the past few years".
"Estimates vary so widely they are almost meaningless. Government officials, analysts and economists have offered numbers that range from 15 trillion yuan to 30 trillion yuan ($2.46 trillion to $4.92 trillion), which equals nearly 30% to 60% of gross domestic product.
The size of the debt and the uncertainty about how much is out there also underscore a major risk facing the Chinese financial system: how little control the central government has over borrowing by cities and towns".
"Estimates vary so widely they are almost meaningless. Government officials, analysts and economists have offered numbers that range from 15 trillion yuan to 30 trillion yuan ($2.46 trillion to $4.92 trillion), which equals nearly 30% to 60% of gross domestic product.
The size of the debt and the uncertainty about how much is out there also underscore a major risk facing the Chinese financial system: how little control the central government has over borrowing by cities and towns".
China's National Audit Office last counted the country's local government debt at the end of 2010, when it put the figure at 10.72 trillion yuan, or 27% of GDP. But borrowing has exploded since then as local governments have sought to keep growth going as Beijing scaled back the huge stimulus it launched to offset the global financial crisis.
"Local government debt has been growing at a speed of nearly 20% a year in the last couple of years. If this trend continues, it will definitely bring about systemic risks for China's economy," said Nomura economist Zhiwei Zhang.
"The numbers matter a lot to Beijing. If the debt is backed by the Central Government, they argue, it should be considered part of China's national debt, pushing that total to a worrisome 200% of GDP, up from 129% at the end of 2008, according to Fitch Ratings.
Beijing has enough cash to prevent bonds from defaulting and absorb losses if they do, and there is no immediate threat of a local government debt crisis. The worry among economists is that the debt will weigh on economic growth by constraining further investments. There is also worry that the central government will let some local governments default to show that it won't back all of this debt, potentially triggering a selloff in these bonds, hurting investors.
In a survey of 36 local governments released in June, China's state auditor said that among the 223 financing vehicles run by these governments, 151 of them failed to generate enough revenue to cover their annual debt repayment. "Because of their inadequate repayment ability, some provincial capitals had to borrow new debt to pay for their old debt," the state auditor said.
"Analysts raise several concerns. First, they argue that because local government debt will likely be backed by Beijing it should be considered part of China's national debt. Second, because much of this debt is backed by land owned by the local governments, a decline in land prices could wipe out some of the collateral on the bonds".
"Since many local governments use land as collateral for their debt, a potential fall in China's property market will pose huge risks to them," said Terry Gao, a senior analyst at Fitch Ratings.
That puts Beijing in a difficult situation. If it continues to try to push down property prices, which have been climbing rapidly, it risks leaving itself saddled with more bad debt from local governments.
The last big concern is that governments spent the proceeds of the bonds on unnecessary projects that are unlikely to boost local growth, which would make it harder to pay off the bonds".
