The results are finally in. Six months after the announcement of a local government debt audit in China, the National Audit Office (NAO) has revealed that as of the end of June 2013, levels had soared to nearly RMB18 trillion, ($3 trillion). As 2013 draws to an end, how to tackle this issue next year will be a key policy headache for Beijing.
China’s National Audit Office has spent the last six months carrying out an extensive debt audit (the details of which can be read in the official Chinese-language public statement here). Tens of thousands of auditors (54,400 to be exact) looked at the debt levels of 31 provinces, 391 cities, 2778 counties, and more than 33,000 township governments.
The results of the audit show that local government debts had reached RMB17.9 trillion ($2.95 trillion) by the end of the first half of 2013. This level represents about 30 percent of China’s GDP, and has increased by 67 percent from the level at the end of 2010.
These figures are large, but in fact they are lower than many worst-case estimates that have been floated around in the media during recent months. For example, former finance minister Xiang Huaicheng had postulated the total could be more than RMB20 trillion ($3.29 trillion), while even more pessimistic estimates had the number at over $4 trillion.
Still, there is not much cause for celebration. First, six months have passed since the end of June, and the total as of now (year-end 2013) could well have continued climbing – even if not at the fast paces seen since the global financial crisis of 2008. Second, the figures may not be fully representative of the whole picture, as doubts about official data in China remain.
More importantly though are the questions raised about what should happen going forward. The build up of debt must be tackled as rates are obviously unsustainable. Equally, the massive existing stock of debt must be serviced without creating any kind of financial distress.
The difficulty is that getting a grip on the former is going to have a negative impact on the latter. The flow of credit has been both facilitating the creation of new debt and partially allowing the pre-existing debt to remain performing. China’s credit-driven growth is slowing, and it will not be easy finding the right balance as the economy slows.
As The Diplomat noted in September, policymakers have several options for dealing with government debt in China. Deciding which to choose (and when) in light of potential ripple effects and the results of other concurrent reforms is no enviable task.
So 2014 is going to be an interesting year for Beijing, even with the positive trend in the external environment.