China’s National Audit Office has confronted long-swirling rumors that a local government debt crisis could trigger a Lehman Brothers–like shock to the world’s second-largest economy. The NAO recently finished an exhaustive survey of the nation’s 33 provinces and self-administered municipalities. It found that total government debt stood at 27.8 trillion yuan ($4.6 trillion) at the end of 2012 and 30.3 trillion yuan — 56 percent of GDP — last June. Local governments owed 17.9 trillion yuan of the latter, or 33 percent of GDP.
Conceding that rising government debt is a concern, the NAO described levels as normal by international standards; total U.S. government debt is $21 trillion, or 131 percent of GDP. But analysts worry that much of China’s debt has appeared since the 2008 financial crisis. “While the stock of general and local government debt is manageable, the pace of debt accumulation in recent years has been alarming,” says Wang Tao, head of China economics research at UBS in Hong Kong, who notes that between the end of 2010 and last June, local debt surged 67 percent.
Driving that increase was a spike in infrastructure projects, from toll highways to subways, that city and provincial officials launched to spur growth as demand for Chinese exports flagged. The central government could assume some local debt directly or through banks as bad debt write-offs, Wang says: “However, at this moment, we do not foresee it as an imminent solution given that there are still local-central fiscal relations and moral hazard issues to be worked out.”
Beijing-based securities lawyer Guan Anping, a government adviser and a onetime legal aide to former vice premier Wu Yi, points out that the NAO report followed last November’s pledge by President Xi Jinping and Premier Li Keqiang to give markets a decisive role in China’s economy. “I don’t see a fire sale coming, but I see the government selling off many assets in the coming years to pay down debt,” he says. With officials under pressure to keep the economy expanding, that would favor global investors, Guan reckons: “The best way to maintain growth is to bring in private investors, both domestic and foreign.”
