Dec 31, 2013 06:27 PM

Closer Look: Rise in Total Gov't Debt – to 30.3 Tln Yuan – Means Change Is Needed

(Beijing) – Three months after an official audit of government debt was completed, the results have finally been announced. As of June 30, the total debt held by the central and local levels of government has reached 30.3 trillion yuan. Of that, local governments were 17.9 trillion yuan in the red.

This is the third time the National Audit Office has surveyed government liabilities. The survey was the work of some 544,000 auditors across the country. It was performed in August and September, and a report was given to the State Council, the country's cabinet, in mid-October. Suspicion had mounted about how horrible the figures were considering it took so long for the government to publish them.

Experts, especially those from overseas institutions and academia, tended to be pessimistic in their estimates of total local government debt, guessing the figure would be 18 to 25 trillion yuan. Chinese government officials and affiliated institutions were generally more sanguine, estimating it to be between 15 and 20 trillion yuan.

The audit results show that local government debt pretty much fell in between the two. The central government's debt was much closer to expectations due to its relative transparency.

Still, some skeptics say the audit office may have tweaked the figures to ease the blow.

The latest survey employed the same techniques and the same definition of government debt as previous ones, but it was more thorough and comprehensive, reflecting most accurately the condition of government liabilities.

A breakdown of its result shows that the total debts of governments at the county and township levels were only 364 billion yuan as of June 30, far below expectations of 2 trillion yuan. Most of the debtors are rural credit cooperatives, private businesses and individuals.

Since 2007, the central government has been gradually alleviating government debt at the grassroots level on items including compulsory education and rural medical care. This contributed to reducing debt burdens.

Despite this, local government debt rose by 6.8 trillion yuan in merely 30 months, even though harsh policies restricted borrowing. That was rapid expansion. In particular, direct liabilities held by local governments increased by 3.9 trillion yuan in that period to 10.9 trillion yuan.

This year, the budgeted income for all local governments is expected to reach 6.7 trillion yuan. That means the ratio of their direct liabilities to income would be 158 percent. This alone is a strong argument that the central government's measures for controlling local government debt during the past three years have not been effective.

While most attention is focused on local government debt, the liabilities of the central government are also a big concern. As of the end of June, the central government's direct liabilities were 9.8 trillion yuan, up 370 billion yuan from the end of 2012. Meanwhile, the growth of its tax income has slowed. With an expected income of 6.2 trillion yuan this year, the central government's direct liability ratio is also as high as 158 percent.

The audit results also shed light on how heavy a burden the interest payments required by existing loans are for the government. Assuming interest rates of 3 to 7 percent, the direct liabilities held by the central and local levels of government – which totaled 20.7 trillion yuan – would require 620 billion yuan to 1.45 trillion yuan in interest payments. That would amount to 5 to 11 percent of the country's tax income. This means a loss in the financial resource available for social welfare programs.

Even though the total amount of government debt seems to be under control, officials can wait no longer to stem the growth. We need a more fundamental solution to controlling debt risk because previous measures have failed.

The Communist Party's Organization Department, which handles personnel matters, said in a document released on December 9 that the performance evaluation of officials would take into account government debt conditions. The annual course-setting Central Economic Work Conference also emphasized the need to prioritize controlling and finding a solution to local government debt.

A clear understanding of the debt's size and type would be the foundation for all other work. Including debt in the criteria used to assess officials would pin the obligations of a loan to whoever borrowed it.

Such a mechanism would go straight to the heart of the problem in a system where bureaucrats answer to higher bureaucrats. But whether it can be effective depends on the weight of debt in the evaluation formula and how long the policy can be enforced.

It is important, as the audit office advised, to establish a formal and standardized mechanism for governments to raise funds and manage their debt. The big question about government debt is not whether governments should borrow or not. Rather, it should be who carries out the borrowing and how – and who pays in the end.

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