Chinese Local Government Debt “Serious:” Local Debt Expert

While the recent financial crisis in the West was triggered by the US sub-prime mortgage market, many analysts believe that in China it's local government debt that could trigger a future financial crisis in the world’s second largest economy.

China’s audit office has uncovered over $80-billion of irregularities in local government debt, yet the problem may be even worse than what statistics show.

[Yang Zhenghu, Director, Guangdong Social Sciences Association]:
“Of the several cities I have surveyed, the problem is far more serious than what has been revealed. The statistics bureau, when summing up this data, has a certain amount of freedom to exaggerate, they can adjust the statistics according to political preference. The longer this goes on, when we research, the data we find shows an even more difficult situation.”

While the usual sources of income for local governments are decreasing, their spending is increasing. Yang Zhenghu says this debt based spending will eventually cause problems.

[Yang Zhenghu, Director, Guangdong Social Sciences Association]:
“The income of the local government from property sales has decreased a lot, but the overall income of the local government is still rising. With such a high debt level, in the end the burden will fall on the tax payers.”

Yang says local governments are using a variety of methods to shift their debt around and maintain interest payments. Those methods mostly involve borrowing more money.

[Yang Zhenghu, Director, Guangdong Social Sciences Association]:
“Different types of tools and methods can be used to make the data not look so bad. There are many methods to avert the risk [of default], originally [local governments] didn’t have mortgages, but now they mortgage some land or real estate, so their debts are less likely to be regarded as toxic.”

Economists estimate that there are over $300-billion worth of bad loans within a total local government debt pile of over one point five trillion US dollars.