Aug 31, 2011 05:06 PM

Local Governments Admit Being Deep in a Hole

The island-province of Hainan in China's sun-soaked south is often compared to Hawaii for its lush beach resorts and productive pineapple farms.

It's also home to what may be the nation's highest rate of local government debt, based on reports recently filed with the National Audit Office.

Which begs a question: If debt is dogging a tropical paradise like Hainan, what's it doing to local governments in the country's far less Edenic provinces, municipalities and autonomous regions?

Answers are starting to emerge. Hainan was one of 10 governments across the country – ranging from the city of Beijing to Henan Province in China's heartland – that recently filed individual debt reports to supplement the audit commission's 2010 nationwide assessment of local borrowing.

The island's provincial government reported a debt-to GDP ratio nearly 50 percent at the end of 2010. The ratio of debt-to-financial assets for direct government borrowing was a comfortable 70 percent, Hainan officials said, but the ratio was much higher – 93 percent – for direct borrowing coupled with government-guaranteed loans to other parties, such as state-owned companies.

Debt-GDP ratios were likewise high – exceeding 35 percent – in Jilin Province in China's northeast and Ningxia Autonomous Region in the north-central part of the country.

Altogether, the 10 governments that filed reports so far owe 2.8 trillion yuan. That compares to what the audit commission said was about 10.7 trillion yuan in outstanding debt for all local governments across China last year.

For the 10 governments, the reports also pointed that the debt situation is still under control as an average debt-GDP ratio is lower than an international standard for governments of 60 percent.

Warning Signals

Owing more than any other government in the group as of January 1 was Shandong Province, excluding the city of Qingdao and its adjacent prefecture, which reported more than 475 billion yuan in debt. Shandong remains fiscally strong, however, since that debt level equals only 14 percent of GDP.

Shandong's Provincial Audit Department said debt ratios for 15 prefecture-level districts and counties, excluding Qingdao and Jinan, were significantly below nationwide averages. The group's direct government debt-to-assets ratio was 37 percent, the department said, while the ratio of combined direct debt and all guaranteed debt was 46 percent.

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