China orders audit of local government debt

China's cabinet has ordered an urgent nationwide audit of debts owed by local governments, reflecting unease about potential financial threats from unreported multibillion-dollar borrowing.

The order announced Sunday by the National Audit Office in a one-sentence statement gave no details or a timeline. But the ruling Communist Party's main newspaper, People's Daily, 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 rising debts of China's city, county and other local governments have prompted concern about possible threats to the state-owned banking system if borrowers default.

A deputy finance minister, Zhu Guangyao, said this month the total amount of borrowing was unknown but he expressed confidence the debt load was manageable.

Can't impose taxes

Local governments face rising financial burdens to pay for schools, health care and other programs promised by Beijing. But most are barred from imposing their own taxes and have limited sources of financing. They rely on land sales and borrowing from banks.

Borrowing accelerated after the 2008 global crisis, when Beijing pumped money into the economy through higher spending on building subways and other public works. Many were financed by local governments with loans from state banks.

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Local leaders also created finance agencies to pay for construction of highways and other infrastructure. Some of those entities have run into trouble raising revenues to repay their debts.

The National Audit Office reported last year that local governments ran up debts of 10.7 trillion yuan ($1.79 trillion Cdn) over the preceding decade, which is equal to about one-quarter of China's annual economic output.

"We admit candidly that we still face challenges," said the finance official, Zhu, at a July 5 news conference. "We need to stay alert to the risks but we also are confident in the general situation."

China's total debt is relatively low as a percentage of its economy. But some analysts warn the speed of increase in recent years could lead to problems.

"Further rapid growth of debts would raise the risk of a disorderly adjustment in local government spending," said the International Monetary Fund in a report this month. "This would drag down growth, with adverse global spillovers."