Experts downplay local government debt risk

BEIJING - Concerns about China's local government debt risks have been overblown, academics and analysts say.

The world's second-largest economy still enjoys dynamic growth and has strengthened its management of local government debt, they say.

This is mainly invested in productive assets, according to Wang Dehua, researcher at the National Academy of Economic Strategy of the Chinese Academy of Social Sciences.

When compared with major economies such as Germany and Japan, China's local debt balance to GDP ratio was lower in 2015, Wang says, citing data from the Organisation for Economic Cooperation and Development.

"The data has fully demonstrated that the allegation of high risk in China's government debt is wholly groundless," Wang says.

China's local government debt soared during an investment and construction binge following the global financial crisis in 2008. Well aware of the risks, authorities have rolled out a string of measures to reduce the problem.

According to data from the Ministry of Finance, local government debt totaled 15.32 trillion yuan ($2.3 trillion; 1.9 trillion euros; ￡1.7 trillion) last year, while central government debt reached 12.01 trillion yuan. The total government debt accounted for about 36.7 percent of the country's GDP, well below the warning level by international standards.

While the debt total of 15.32 trillion yuan was lower than the cap on 17.2 trillion yuan set by the central budget for 2016, it was still a 41 percent increase from 2013, the National Audit Office says.

Data released by the ministry showed that China swapped 8.1 trillion yuan of debt under the program last year. In 2016, this saved local governments 400 billion yuan in interest by initial estimates.

"While exposure of hidden debt could reduce risks, the fact that local governments do not have monetary sovereignty makes it harder for them to contain risks," says Zhao Quanhou, director of the financial research center at the ministry's Chinese Academy of Fiscal Sciences.

China has put a ceiling on the amount of local government debt through a quota system.

Authorities are also ramping up efforts to correct irregularities in local debt issues such as financing through fake public-private partnerships and illegal borrowing through financing vehicles.

New items may be gradually added into the "negative list" of local government financing, says Qiao Baoyun, director of the Chinese government debt research center of the Central University of Finance and Economics.

According to Qiao, authorities have focused on bringing greater transparency to local government bonds by protecting the legitimate interests of investors.

Latest checks by the National Audit Office have found debts that local governments have committed to repay with public funds in selected provinces, cities and counties have climbed by 87 percent compared with the level in mid-2013, but the overall risk can be controlled.

"The challenges to local government debt management in China are like growing pains," Qiao says. "China has clear reform goals. It is believed that China can continue to identify, understand and solve problems in practice."

Xinhua

(China Daily European Weekly 07/28/2017 page29)