Growing Debts of China's Local Governments

JUNE 27, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

How much debt have China's local governments taken on?

A report by China's National Audit Office, published Monday, says that local governments are in the hole for $1.7 trillion, the equivalent of 27% of gross domestic product at the end of 2010. At first sight, that is reassuringly nestled between numbers in reports from other arms of the government. According to the Chinese press, the Banking Regulatory Commission put the total at $1.4 trillion. A report by the Central Bank hinted at a total of $2.2 trillion.

But appearances may be deceptive. The National Audit Office report looks at total local government debt. Within that estimate, the auditors say debt taken on by local government financing vehicles—entities set up and backed by local governments to get round constraints on their borrowing—accounts for $764 billion, a little less than half of the total.

But the numbers reported by the banking regulator and central bank reflected exclusively debt taken on by local government financing vehicles, excluding other sources of debt. So on the subject of how much debt has been taken on by these shadowy shell companies, the three reports come to radically different conclusions, with the National Audit Office estimate considerably lower than the others.

Professor Victor Shih of Northwestern University, an expert in China's local government debt, suggests that a more realistic view of the total comes from adding up the estimate of debt taken on by local government departments and organizations—independent of the financing vehicles—in the Audit Office report, and debt taken on by financing vehicles in the People's Bank of China report. That suggests local government debt at the end of 2010 could be close to $2.6 trillion, or 42% of GDP.

That number is a lot less reassuring that the headline figure from the National Audit Office report. In the context of low central government debt, a high economic growth rate, and significant assets on the other side of the local governments' balance sheet it does not suggest a debt crisis. But it does mean a substantial chunk of the bill for China's investment-driven growth is yet to be paid.

Write to Tom Orlik at Thomas.orlik@wsj.com