China worries local government debt could trigger financial crisis

Orders immediate audit of this rising US$1.6 trillion debt.

The State Council, China’s cabinet, has ordered an urgent nationwide audit of debts owed by local governments over fears about potential financial threats from unreported multibillion-dollar borrowings.

The order was announced by the National Audit Office in a one-sentence statement that gave no details or a timeline. The Communist Party’s main newspaper, People’s Daily, however, said the Cabinet sent an urgent message ordering the audit and told local audit officials to suspend work on other projects until it is completed.

The massive and rising debts of China’s city, county and other local governments have prompted concern about grave threats to state-owned banks if local government borrowers default.

Deputy finance minister Zhu Guangyao earlier said the total amount of local government borrowing was unknown. NAO, however, last year reveled that local governments ran up a total debt of US$1.6 trillion over the preceding decade. This amount is equal to 25% of China’s annual economic output.

Local governments are banned from imposing their own taxes and have limited sources of financing. They rely on land sales and borrowing from banks to finance schools, health care and other programs promised by Beijing.