China warned of banking crisis over huge debts of local governments

BEIJING: The whopping USD 624.61 billion debt owed by 36 provincial Chinese governments could destablise the country's banking sector as they struggled to repay the arrears, China's national auditors warned today.

China's National Audit Office (NAO) warned of the risks relating to some local governments' fast debt growth and the pressure to repay existing arrears as a four-month audit, by the office found liabilities of 3.85 trillion yuan (USD 624.61 billion) owed by 36 local governments.

This included top local governments like Shanghai, Tianjin and Chongqing municipalities as well as Jiangsu, Guangdong and Shandong provinces, by the end of 2012.

The debt amount was 12. 94 per cent higher compared with the end of 2010, the NAO said.

It attributed some local governments' fast debt growth to declining revenues from land sales, a major source of the authorities' fiscal revenues, and exemption of road tolls in some regions, state-run Xinhua news agency reported today.

Escalating growth in local government debt has raised concerns that hidden debt problems could trigger instability in China's banking system, leading to the Chinese government being vigilant against financial risks.

Despite the risks relating to rising debt levels, the NAO also warned the problem of lax budget controls and poor management in some regions, which make the situation worse, the report said.

The warning came amid plans by various local government to expand the infrastructure by building more metro rail systems imposing further strains on the fragile finances.

The NAO said its current audit was a follow-up audit after a nationwide one in 2011, which found that local governments' debt levels hit 10.7 trillion yuan (USD 1.75 trillion) at the end of 2010.

Combined debt of the 36 local governments accounted for 31.79 per cent of the 10.7 trillion yuan back then.

Of the 36 local governments, 24 saw their debt levels rise at the end of 2012 compared with two years ago while 12 saw their debt swell more than 20 per cent during the period.

Results of the follow-up audit, intend to help assess the situation of local government debt.

However, the audit cannot be simply used to calculate local government debt levels nationwide as the situation varies by region, the NAO said.