Twenty six per cent of $1.15 trillion debt incurred by local government in China faced risk due to unqualified borrowers and collateral problems, official media reports said.
As of June, debt incurred by the local government financing vehicles amounted to 7.66 trillion yuan ($1.15 trillion), of which 2 trillion yuan, or 26 per cent, faced serious risks regarding their repayment, due to unqualified borrowers and problems related to collateral, the China Securities Journal reported.
Some economists estimated that the total amount of debt faced by local governments reached 10 trillion Yuan by 2010.
Also nearly one third of local governments are unable to pay back their debts and many have no intention of paying them back at all, according to noted Chinese economist, Cheng Siwei.
Cheng, who is also the former vice chairman of the standing committee of the National People's Congress, said at a financial conference held in Beijing yesterday that the large amount of money supply in 2009 had led to the rapid increase of local governments' debts.
Inspections by the National Audit Office showed that the debts of more than one third of local governments had exceeded their fiscal revenues,
Global Times reported. Cheng warned that the central government may have to step in to cover the bill, if local governments are unable to repay it, which is one of the reasons many local governments were willing to borrow despite the risk of default.
Cheng said he had heard some local officials say, "It is foolish not to borrow money, even more foolish to return the money after borrowing." Yuan Gangming, an economist at the Chinese Academy of Social Sciences, said banks do not easily give loans to private enterprises until they are sure they are capable of paying them back.
However, their attitude is different when it comes to local governments and state-owned enterprises, as the central government won't let them go bankrupt and will foot the bill. "In fact, the debt is transferred to taxpayers," Yuan said.
Zhong Wei, a finance professor at the Renmin University of China, said reforming the existing tax-sharing system, which was introduced in 1994, will help solve the debt burden. Under the tax system, local governments get only 25 per cent from value-added tax, the largest part of national revenue, while the central government takes away the remaining 75 per cent.
"They have to make money to pay public service bills, which have been mounting in recent years," Zhong said. Although the debt situation appears to be worsening, Ba Shusong, a government researcher at the Development Research Center under the State Council, said the risk of the Chinese government's debt was not high in terms of its proportion compared to GDP with other countries, and a local government debt crisis is not likely.
According to a report issued by Goldman Sachs last year, the Chinese government's total debt in 2009 accounted for 48 per cent of the country's GDP, while the US debt-to-GDP ratio is close to 90 per cent and Greece's is 130 per cent.