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Worried lawmakers demand clarity on China’s local government debt woes

30 July 2017 No Comment

by Frank Tang in South China Morning Post, July 30, 2017
Chinese lawmakers are dissatisfied with a lack of clarity on the country’s local government debt troubles, according to minutes released earlier this week from a meeting where members of parliament questioned government officials over the country’s fiscal and debt situation.
While the Chinese government has repeatedly assured the world that China’s local government debt risks are under control, some 50 Chinese lawmakers urged Zhang Shaochun, a vice finance minister, and Hu Zejun, the country’s chief auditor, at a meeting last month to pay attention to risks stemming from direct and indirect borrowing by local authorities.

“There are new ways of providing illegal and irregular guarantees, and there’s no clear answer to the actual number of hidden debts,” according to a summary of the lawmaker comments published by the National People’s Congress Standing Committee, the parliamentary body that can summon and question ministers.

“It shouldn’t be neglected that this may lead to systemic risks,” the summary said.

On the surface, China’s outstanding local government debt was 15.3 trillion yuan ($HK17.7 trillion) at the end of 2016, much lower than the cap of 17.2 trillion yuan approved by the legislature. The combined central and local government debt was 27 trillion yuan, representing only 36.7 per cent of China’s gross domestic product. By that metric, the Chinese government is one of the less debt-heavy big economy governments: the US’ gross federal debt to GDP stood at 106.1 per cent last year.

“Government debt risks are controllable – it’s our answer with reason and confidence,” Liu Wei, a vice finance minister, said at a press conference in Beijing on Friday. He added the outstanding local government debt has increased to 15.8 trillion yuan as of the end of June and is still within a safe zone.

However, the real concern about China’s local government debt is that the official figure, released by China’s Ministry of Finance, may not depict the debt landscape accurately as local governments have designed many ways to disguise government debt as corporate borrowings or credit guarantees.

Wang Zhijun, an official with the Office of Central Leading Group for Financial and Economic Affairs, said on Thursday that local government debt is one of the “grey rhino” risks in the Chinese economy, meaning the risk is big enough to derail China’s growth, along with risks such as shadow banking and the property market bubble.

The murky local government debt situation also concerns international investors trying to gauge the health of China’s US$11 trillion economy. Moody’s downgraded China’s sovereign rating in May, citing debt as a reason.

In China’s centralised power system, every level of government ultimately has a tacit guarantee from Beijing, which encouraged local officials to borrow as much as possible. China’s top leaders headed by Xi Jinping decided at the national financial work conference earlier this month that local government officials must be held permanently accountable for debt they incur.

Zhao Quanhou, a senior researcher with the Chinese Academy of Fiscal Sciences, said local debt is expanding because there’s “demand for improvement of economic condition” and pursuit of promotions by local government officials.

Beijing’s repeated efforts to rein in local cadres’ accumulation of debt is a cat-and-mouse game that won’t solve the problem from the root.“These actions only scratch the surface,” Zhao said.http://www.scmp.com/news/china/economy/article/2104568/worried-lawmakers-demand-clarity-chinas-local-government-debt

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