BEIJING, Aug. 16 (UPI) — Local governments’ debt at the end of 2010 totaled $1.7 trillion, but the Chinese finance ministry said it is “controllable” with some risks.
Last year’s debt, as reported by the National Audit Office, accounted for 27 percent of China’s gross domestic product, but China Daily reported the ministry’s announcement calmed fears it could derail the world’s second-largest economy.
“Judging from the audit results, local government debt is, generally, controllable, though there are potential risks in some areas,” the ministry said on its Web site.
The statement said local governments have enough resources to act as buffers to potential risks such as fiscal income, fixed assets, land, and natural resources.
China’s powerful Cabinet or State Council said last month it will continue to clean up local government financing and set up a mechanism to regulate the way local governments raise money, such as borrowing through corporate bodies they create, China Daily reported.
Zhang Shuguang at the Institute of Economics at the Chinese Academy of Social Sciences told China Daily while the overall debt risk is under control, there could be a “structural crisis.”
“Debt repayment is heavily dependent on land sales,” Zhang said, noting nearly 40 percent of all local governments have promised to repay their debt with money raised from land deals.
However, land sales have declined 11 percent year-on-year in the first five months of this year and may drop further due to tightening of real estate policies.
“If land-based finance continues to worsen, a large crisis may loom,” Zhang said.
The report said at the end of 2010, there were 78 cities and 99 counties whose governments were on the verge of bankruptcy as their debt to revenue ratio had exceeded 100 percent. Some of these governments have already defaulted.
Another expert said financing vehicles of most local governments are facing a problem of cash flow rather than insolvency.