beyondbrics

By Victor Shih of Northwestern University

How much local government debt is there in China?

On Monday, the National Audit Office (NAO) released a report, stating that local debt in China totaled some Rmb10,700bn as of year-end 2010. Is that the new official estimate for local governmental debt? In short, no.

Combining the findings of the NAO, the CBRC, and the PBOC in recent months, the total official estimates of local governmental debt now range between Rmb15,400bn and Rmb20,100bn.

Here is how we arrive at these numbers. First of all, we have to understand that the National Audit Office is like the Congressional Budget Office and only cares about debt directly owed by local government organs or debt directly guaranteed by local government organs.

It does NOT care about liabilities of central and local governmental entities, which were not guaranteed by the government. Chart 3 of the report states that the audit uncovered Rmb4,970bn in local government financing vehicle (LGFV) debt as of the end of 2010, and another Rmb5,700bn or so owed by local government organs and “business units subsidised by the budget.”

However, based on the figures previously released by the CBRC and the PBOC, we know that the Rmb4,970bn LGFV debt figure is way too low. The discrepancy between the CBRC and PBOC estimates and the NAO number arises from the fact that the NAO was only looking for LGFV debt in which the local government has issued decrees or guarantees to underwrite. Thus, LGFV debt which is guaranteed by another company or is collateralised by land was not part of the NAO audit.

The most important finding of the NAO report is the non-LGFV local debt of Rmb5,700bn because this is the first authoritative non-LGFV local debt number we have seen from the government in a long time. We therefore can add the Rmb5,700bn to the LGFV numbers previously revealed by the CBRC and the PBOC.

Thus, estimates of local debt – based entirely on official numbers – range between Rmb15,400bn (Rmb9,700bn in LGFV debt plus Rmb5,700bn in non-LGFV debt) and Rmb20,100bn (Rmb14,400bn in LGFV debt plus Rmb5,700bn in non-LGFV debt). Note that the higher figure constitutes over 50 per cent of China’s GDP in 2010.

The problem going forward is that interest payments on this staggering debt is at least Rmb1,000bn a year for the foreseeable future. In the mean time, local governments continue to seek new financing for grand projects.

The Chinese government took important steps forward in recognising the dangerous scale of local governmental debt, but now it must have the resolve to stop local level leveraging before risks in the financial system steam out of control. This will be a challenging, but important step for the future of the Chinese economy.

Related reading:
China’s towering debt threat, beyondbrics
China’s uncollateralised, cash flow-less, local government loans, Alphaville
Guest post: China’s credit bubble goes underground, beyondbrics