THE BLOG

China's Local Government Debt Explodes

Jan 02, 2014 | Updated Mar 04, 2014

While much of the discourse on public debt and deficits among economists and media pundits has been related to the Eurozone Crisis, especially regarding Greece, or major developed economies such as the United States and Japan, much less has been heard about China's fiscal status. Yet, one of the most rapidly growing factors of public debt is occurring right now, in China, largely under the radar of the so-called fiscal prophets of doom.

At present, according to always questionable official statistics from Beijing, China's total public debt represents 58 percent of the nation's GDP. This is significantly lower than is the case with Japan and the United States. However, it is the rate of growth of that debt, particularly in connection with Chinese local governing authorities, that may begin to sound alarm bells. It appears that following the global economic and financial crisis of 2008, cities across China embarked on a massive borrowing and spending binge in a super-charged Keynesian effort to sustain China's traditional high annual rate of economic growth.

China's National Audit Office (NAO), following directives from the national authorities in Beijing, undertook an extensive accounting and auditing of the books of all of the nation's local spending authorities. What they discovered was that in only three years, China's local public debt grew by a staggering 70 percent, reaching a total of 17.7 trillion yuan, equivalent to nearly three trillion U.S. dollars. Another statistic is sounding alarm bells in China; up to 80 percent of all bank lending in China during the period following the onset of the global economic crisis was to local governments.

The vast spending spree by city governments across China has erected vast quantities of housing stock and commercial edifices that are unoccupied and infrastructure projects that are underutilized. Some economists, particularly outside of China, may defend this massive and largely uncontrolled public debt expansion as enlightened public policy, aimed at preventing high rates of unemployment in China. However, China's national leadership is clearly worried about this stunning rate of growth in public debt at the local level, far outstripping real economic growth rates. Beijing knows that seeding official GDP growth rates with an unrestrained tidal wave of red ink is not a sustainable economic path to pursue. The dilemma for Beijing's economic policymakers is this; now that they know they have a serious problem of exploding public debt, what options are open to them that impose the least degradation to their cherished high rate of annual GDP growth? Their ultimate answer will inevitably have profound implications for the entire global economy