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Monday 25 July 2011
Local government debt poses risk to growth, says PBOC advisor
China has at least two years to sort out its mountain of local government debt, which poses a ‘very serious’ risk for the fastest-growing economy over the longer term, People’s Bank of China adviser Zhou Qiren said.
Local government debt poses risk to growth, says PBOC advisor
Bloomberg 25 July 2011
China has at least two years to sort out its mountain of local government debt, which poses a ‘very serious’ risk for the fastest-growing economy over the longer term, People’s Bank of China adviser Zhou Qiren said.
The country’s first audit of domestic government debt found liabilities of 10.7 trillion yuan (S$2 trillion) at the end of 2010, 79 per cent of which were bank loans, the National Audit Office said in June. As much as 30 per cent of domestic government financing vehicles’ loans may fail and become the biggest contributor to lenders’ bad debts, ratings agency Standard and Poor’s has said.
The local government debt will not cause a systemic risk to the economy this year or next, Prof Zhou said at a symposium on China’s economy held by the National School of Development at Peking University here on Saturday. Still, Prof Zhou, also a professor at the university, said that the issue reflects ‘the basic problem in the relationship between the government and ordinary people’, as any default would burden taxpayers.
He said that the ‘land finance’ system, under which local governments acquire land from farmers at very cheap prices and use them as collateral to borrow money from banks to finance infrastructure projects, has partly driven the excessive growth in China’s money supply.
M2, the broadest gauge of money supply, surged to 72 trillion yuan by 2010 from 18.5 trillion yuan in 2002, he said.
The land system and the government-directed urbanisation helped cause the country’s high inflation, he said.
‘China needs a prudent fiscal policy, otherwise a high growth can be hardly sustained,’ he said.
Both Prof Zhou and Jia Kang, head of the finance ministry’s Institute of Fiscal Science, suggested that the government allow local authorities’ financing vehicles to issue bonds to reduce reliance on bank loans backed by land sales. Currently, China has only started a trial on the bond sales on a limited basis.
Risks that under certain circumstances might ‘trigger a crisis in some regions and hurt the government’s credibility’ may be found in some local projects funded with debt, Mr Jia said at the same symposium.
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Local government debt poses risk to growth, says PBOC advisor
Bloomberg
25 July 2011
China has at least two years to sort out its mountain of local government debt, which poses a ‘very serious’ risk for the fastest-growing economy over the longer term, People’s Bank of China adviser Zhou Qiren said.
The country’s first audit of domestic government debt found liabilities of 10.7 trillion yuan (S$2 trillion) at the end of 2010, 79 per cent of which were bank loans, the National Audit Office said in June. As much as 30 per cent of domestic government financing vehicles’ loans may fail and become the biggest contributor to lenders’ bad debts, ratings agency Standard and Poor’s has said.
The local government debt will not cause a systemic risk to the economy this year or next, Prof Zhou said at a symposium on China’s economy held by the National School of Development at Peking University here on Saturday. Still, Prof Zhou, also a professor at the university, said that the issue reflects ‘the basic problem in the relationship between the government and ordinary people’, as any default would burden taxpayers.
He said that the ‘land finance’ system, under which local governments acquire land from farmers at very cheap prices and use them as collateral to borrow money from banks to finance infrastructure projects, has partly driven the excessive growth in China’s money supply.
M2, the broadest gauge of money supply, surged to 72 trillion yuan by 2010 from 18.5 trillion yuan in 2002, he said.
The land system and the government-directed urbanisation helped cause the country’s high inflation, he said.
‘China needs a prudent fiscal policy, otherwise a high growth can be hardly sustained,’ he said.
Both Prof Zhou and Jia Kang, head of the finance ministry’s Institute of Fiscal Science, suggested that the government allow local authorities’ financing vehicles to issue bonds to reduce reliance on bank loans backed by land sales. Currently, China has only started a trial on the bond sales on a limited basis.
Risks that under certain circumstances might ‘trigger a crisis in some regions and hurt the government’s credibility’ may be found in some local projects funded with debt, Mr Jia said at the same symposium.
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