HONG KONG — A report by Nomura said Thursday that Chinese municipal debt, a focal point of major concern about the country’s economy, had grown at an alarming 39 percent clip in recent years.
The report by Nomura estimated that the financing vehicles used by local governments to raise cash had created debts totaling at least 19 trillion renminbi, or $3.1 trillion, by the end of last year and posed a “major risk to the economy.”
“Liquidity risks are rising,” said Zhang Zhiwei, chief China economist at Nomura and one of the authors of the report. He added that the bank’s research — based on a survey of 869 of these local government financing vehicles, entities set up to borrow in various ways on behalf of the cities — showed that more than half of the debt would have been at risk of default last year had local governments not supported it.
The number in Nomura’s report roughly matches a recent estimate by Liu Yuhui, an economist in the Chinese Academy of Social Sciences, a government research organization in Beijing.
“I personally feel that the scale of local debt has already broken beyond 20 trillion yuan,” Mr. Liu told a forum in Beijing in mid-September, according to Caixin, a Chinese business magazine. Yuan is another name for China’s currency, the renminbi. “You can say there is a risk of local government debt getting out of control.”
Bank lending and local government debt have soared in recent years, and were a major driver of China’s economic rebound after the global financial crisis. As land sales, a traditional way to raise funds, have slowed, local governments have increasingly resorted to bank loans, bonds or equity market offerings to generate cash for the infrastructure projects that have been propelling growth.
The huge increase in this activity, however, has caused analysts and policy makers to worry about the financial risks accompanying it, and the new leadership in Beijing has made it clear that it wants to rein in those dangers.
In one of the clearest signs to date that they are trying to get a handle on the situation, the authorities in Beijing in July ordered an audit of local government debt. China watchers expect the results to be published in the coming weeks, probably before a plenary session of the Communist Party Central Committee in November, at which more details of China’s broad economic overhaul are likely to be communicated.
Beijing’s eagerness to combat financial risks and bring about more efficient and disciplined allocation of capital will mean slower growth and possibly isolated loan defaults in the coming years, analysts like Mr. Zhang say. But such discipline is also seen as a crucial element of China’s long-term economic development, according to the International Monetary Fund.
“Macro conditions will deteriorate if the current pace of local government debt buildup continues,” Mr. Zhang said. “The efficacy of this debt-driven investment strategy will dwindle as funds raised are increasingly used to service existing debt over new investment.”
He added that the government not only retained ample financial firepower to prop up ailing borrowers and contain a systemic crisis in the next couple of years, but also appeared prepared to tolerate the slower growth that reduced lending would entail.
“We expect some individual L.G.F.V. defaults in 2014, but a systemic default in L.G.F.V. debt in the short term is unlikely, as the fiscal cost to roll over debt is still low,” he wrote, referring to local government financing vehicles. “In other words, the government is still capable of putting L.G.F.V. debt back on a sustainable path, but if it chooses to delay a resolution, the risks — and fiscal cost — may be very high down the road.”
Article source: http://www.nytimes.com/2013/09/27/business/global/report-warns-of-chinese-municipal-debt-risks.html?partner=rss&emc=rss
