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UPDATED: January 13, 2014 NO. 3 JANUARY 16, 2014
Bringing Debt Down
A nationwide audit raises alarms over risks from local government debts
By Zhou Xiaoyan

Therefore, overall China's government debt risks are under control, it said.

The NAO, however, added that there are potential risks in some places, referring to the high growth of local government debt.

Other risks listed by the NAO include local governments using new loans to repay more than a fifth of their debt, heavy debt burdens in some unnamed regions and sectors, and heavy dependence on land sales to repay loans. About 37 percent of debt repayment involved land sale revenue, a level that was deemed too high. Two provinces, 31 prefectures and 29 counties had repaid more than 20 percent of their debts by raising new debt in 2012. Of all debt directly incurred by China's central and local governments, 5.4 percent are overdue and have not been repaid.

The National Development and Reform Commission (NDRC) said on December 31, 2013 that overall debt levels were under control, but it would take measures to keep the debts down, including allowing local government financial companies to issue bonds to replace some existing short-term debt with high interest rates, and encouraging private capital to get involved with infrastructure projects. It will also step up spot checks on local government financing vehicles.

Lu Ting, chief China economist at Bank of America Merrill Lynch, said China's fiscal situation is under control.

"We believe the markets and the Chinese Government should be alarmed by the rapidly rising leverage, but we do not believe China is on the brink of a debt crisis."

Lu cited the Central Government's "very low" ratio of debt to the GDP, which stands at 21 percent.

Lu added that China is protected by national savings that include $3.5 trillion in foreign exchange reserves. Further, the central and local governments have solid assets, and the country still enjoys high economic and fiscal revenue growth, despite the slowdown, he said.

Song Li, a research fellow with the Academy of Macroeconomic Research under the NDRC, said the growth of the debt is in line with the development of the country's infrastructure and other construction.

"China's urbanization requires huge amounts of investment in infrastructure and other areas. So it is natural to see the rapid rise of debt. Unlike debts in Western countries, which are consumption-based, most of China's debts were transformed into property and can yield stable returns," he said.

Tackling the debt

Many experts have suggested China should boost its municipal bond market to give local governments better access to financing, a method that's regarded more transparent and better regulated. It can also block them from resorting to shadow-banking activities, which are lightly regulated and have much higher borrowing costs.

At present, only 10.3 percent of local government debt involves bond issues, the NAO said.

Qi Bin, director of the research arm of the China Securities Regulatory Commission, said municipal bonds and asset securitization will be the two major standard methods for future borrowing.

The finance ministry and the central bank have been studying the feasibility of implementing measures to give local governments more autonomy in bond issuance, in a bid to make it easier for them to raise funds for urbanization projects, the Economic Information Daily reported.

The newspaper reported, citing experts in the knowledge of the matter, that the Central Government may allow local governments to issue municipal bonds independently as early as March 2014. The Central Government is currently testing the ground for such a bond market in Shanghai, Shenzhen and developed provinces including Zhejiang, Guangdong, Jiangsu and Shandong.

Traditionally, the finance ministry has been responsible for the issuance and payment of local government bonds. The role will be handed back to local governments once the new policy is rolled out. The bonds will be paid with local government tax revenues or profits from public projects on which the money raised via the bonds is spent.

The reform plan mapped out at the Third Plenary Session of the 18th CPC Central Committee said that the nation should consider the possibility of establishing policy-oriented financial institutions to address local infrastructure and housing needs.

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