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China to Audit Local Debts as It Cautions a Detroit-Like Crisis

07-29 12:00 Caijing
The National Audit Office will conduct an overal review of local debts this week, acting on the request of the cabinet.

China has ordered a nationwide review of public debts, underscoring fears that a surge of debts accumulated by distressed local governments amid an economic slowdown could spark a Detroit-like crisis.

In an online statement published on Sunday, the National Audit Office said it would conduct a review of overall government debt, acting on the request of the State Council, the cabinet.

The brief statement did not elaborate when the audit will start but according to the Party's mouthpiece newspaper the People's Daily, the July 26 order was "urgent," and that the office suspended other projects to work on the review and will send staffs to provinces and cities this week.

This is the third review for Beijing in nearly three years, following a national wide audit in 2012, which found local debts were 10.7 trillion yuan at the end of 2010, and a random investigation in late 2012 and early 2013, which spotted a surge of nearly 13 percent in debts and an leverage of up to 189 percent in some cities.

The State Council has arranged an overall review of local government debts 10 days after the city of Detroit filed the largest-ever U.S. municipal bankruptcy with debts of at least 18 billion U.S. dollars, said Ye Qing, deputy director of a local audit bureau in Hubei Province.

It's a "quick" response, and a result of the "shocking" debt aggregate in the 36 regions in June's audit, according to Mr. Ye. "Such a profound and nationwide examination of local debts will offer tips for risk prevention, and the establishment of a sound local debt management model," he noted.

Beijing has been wary of the swelling local debts for potential risks to the world's second-largest economy. The government clamped down on local government debt issuance in 2011 as the country's economy showed signs of recovery, but a second slowdown has pushed borrowing up again.

While the economy is slowing and the fiscal revenue is declining, concerns have spread out about the ability of local governments to pay back what they owe especially when some of them rely heavily on declining land sales for revenue.

China's local financing vehicles have now 19-20 trillion yuan in debts outstanding, or 3 percent of GDP, the Standard & Chartered warned in mid-July.

Some 127 billion yuan (21 billion U.S. dollars) of local financing government vehicle notes expire in the second half, according to Everbright Securities Co., the most in its data going back to 2000 and more than double the 62.7 billion yuan that matured in the first six months.

The bankruptcy of Detroit has sounded an alarm that some Chinese governments have to be cautious in taking on debts, and support the development of the real economy, Professor Guo Tinyong at the Central University of Finance and Economics warned.

Related:

--China Audit Report: Local Debt Ratio Up to 189Pct in Some Cities
--IMF Warns over Public Debt Expansion Among Other Risks in Chinese Economy
--Standard Chartered: China of Most Concern in Leverage Among Asian Economies
--Zhang Monan:China's Risky Finances

 

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