Local government debt concerns yet to abate
Updated: 2011-07-06 07:19
By Banny Lam(China Daily)
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The central government has finally published an official audit report on local government debt.
It provides reliable information for those analyzing it as well as assessing its potential impact on the national economy over the medium term.
However, the issue remains cloudy and concerns over the repayment of these local government debts will continue to be a major overhang on the banking sector in the second half of 2011.
China's overall government debt level is manageable. In 2010, central government debts represented 18 percent of annual GDP. Should the local government debt of 10.7 trillion yuan be included in the calculations, the country's total government debt would represent 46 percent of the 2010 GDP, which is still lower than that of other major countries and emerging countries.
Meanwhile, the national government's overall repayment capability is strong as indicated by its sound fiscal revenue condition. The country realized solid fiscal revenue growth of 21.3 percent year-on-year (YoY) to 8.3 trillion yuan last year.
Fiscal revenue surged 32 percent YoY to 4.7 trillion yuan over the first five months of this year and should reach 9 trillion to 10 trillion yuan for full-year 2011. This does not include our forecast non-budget government revenue of 2 trillion to 2.5 trillion yuan (3.6 trillion yuan in 2010). In addition, the central government and local governments have a large amount of assets including listed company shareholdings, state-owned enterprises, land and properties, securing their ability to service debt.
Local government debt falls due in 2011 and 2012, amounting to some 4 trillion yuan. Some of the possible solutions for local government debt include:
(1) Banking regulators may allow a substantial part of the maturing bank loans to be refinanced or rolled over; (2) local governments are likely to increase land supply to accumulate fiscal income to repay their debt in the second half of 2011; (3) the central government may increase transfer payments to local governments to strengthen their ability to service bank debt; (4) debts borne by lower-tier cities (around 1.4 trillion yuan) might be restructured or transferred to the central government over the next few years.
Meanwhile, given the fact that a higher percentage of local fiscal revenue will be used to repay local debts in 2011 and 2012, local infrastructure and fixed-asset investments (FAI) are likely to further slow down in 2012. Factoring this in, the FAI growth for 2012 is forecast at 21 percent against the 23 percent growth estimated for 2011.
Local government debt is also a constraint on the pace of tightening by the People's Bank of China. Therefore, I do not see much room for the central bank to increase interest rates.
The author is Associate Director of Research Division at CCB International Securities Limited. The opinions expressed here are entirely his own.
(China Daily 07/06/2011 page2)