'China's Local Governments Trillions in Debt'

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"In a time of severe global economic recession, China’s economy has grown to become the second largest in the world, by most measures. But China’s debt is also growing.

In a report to the National People’s Congress on Monday, China’s National Audit Office said that local government debt has swelled to 10.7 trillion yuan—that’s more than 1.6 trillion dollars. That’s equivalent to more than a quarter of the country's GDP.

The report confirms many analysts’ fears that China’s debt is much bigger than had been acknowledged. The Finance Ministry has put central government debt at 17% of the GDP. But that didn’t factor in debt from local governments.

Beijing-based research firm Dragonomics, however, did take into consideration Monday’s report from the Audit Office. They estimate the total government debt to be 82% of GDP.

Part of the problem: local government financing vehicles. These are entities created and backed by local governments in order to get around legal restrictions on borrowing. Monday’s report revealed that, for 177 city- and county-level governments, their financing vehicles owe more than the local governments generate in a year.

This puts banks in a loan crisis—because many loans are at risk of going bad. So the question is: can local governments pay the money back?

For Chinese leaders, there is no quick fix to the debt issue. But it’s another looming problem that could be compounded if economic growth slows down"..............LINK