| According to media reports, the nationwide audit of all government debt, which was initiated in August 1, has come to an end. Government debt at all levels has surpassed 14 trillion yuan ($2.29 trillion), much more than that revealed during the previous round of audits. The piling up of local government debt may result in macroeconomic and financial uncertainties.
The root of the mounting government debt, to some extent, lies in governmental intervention in market operation. Therefore, measures should be taken to rein in administrative forces and set up a healthy long-term mechanism for local debt.
The market together with the government has contributed jointly to the rapid economic growth of China during the past three decades. In particular, during the global financial crisis, it was the economic stimulus package launched by the government that propelled China to take the lead during the recovery.
Apparently, excessive intervention from local governments has not only hindered market efficiency, but also sped up the accumulation of government debt. In the wake of the financial crisis, weak external demand pushed China to rely mainly on government-driven investment. Such a solution, however, cannot completely resolve the remaining deep-seated contradictions.
What's worse, in the pursuit of better performance, some government leaders tend to consider investment as the only driver of economic growth, increasing the strain on fiscal expenditure. As a result, government debt has become commonplace across the country.
During the audit of local governments by the Nation Audit Office this year, 36 of the local governments inspected were found to have a weak ability to repay their accumulated debts. Nine provincial capitals witnessed their debt ratios climb to at least 100 percent, with the highest hitting 219.57 percent; 13 saw their debt servicing ratios exceeding 20 percent, with the highest reaching 67.69 percent; two witnessed overdue debt ratios rising above 10 percent, with the more severe one hitting 16.36 percent.
Finding themselves under pressure caused by debt, local governments tend to sell land as their primary source of generating funds for repayment. In the first nine months of 2013, land transactions stood at 608.2 billion yuan ($99 billion), up 14.6 percent year on year, and a 9.4-percent increase compared to that in the first eight months.
Housing prices are rising in line with land prices. During the first three quarters, housing prices increased throughout the country. According the National Bureau of Statistics, 65 out of 70 large and medium-sized cities saw price increases in their new commercial residential buildings in September.
Only by making a transition in local government functions, from administrative to service-based, can the dangers of local government debt be effectively nullified. A main purpose of modern government is to provide public services that offset faults in market mechanisms. Development of the local economy is also undoubtedly the responsibility of local governments, but this still requires effective restraints on their powers.
For instance, when it comes to large-scale infrastructure projects, consideration should be given to both economic and social demands as well as fiscal burdens, rather than growth targets alone.
The existing methods of assessing local governments should be reformed and amended to restrain local government functions, appropriately reducing the importance of GDP results and stressing the significance of ecological preservation and public services. When the necessity for examination and approval is lessened, administrative intervention will decline correspondingly.
This is an edited excerpt by Xiang Zheng, a financial commentator, published in Securities Times | 
