Chinese local governments are padding their balance sheets with billions in fake assets

New projects for these guys, more risky debt for local governments.
New projects for these guys, more risky debt for local governments.
Image: Imaginechina via AP Images
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Even China’s most prominent cities and provinces are increasingly relying on high-risk and murky forms of borrowing. That’s according to a new report from China’s National Audit Office on the finances of 36 provincial and municipal governments (link in Chinese). The report covered the governments of cities including Shanghai, Chongqing and Tianjin, and the provincial governments of Guangdong, Jiangsu and others. Here’s a roundup of the most notable numbers:

Local government debt hasn’t gone up much recently… or so it might seem. At the end of 2012, those 36 local governments had racked up $628 billion in debt, a 12.9% increase on what they’d amassed by the end of 2010. That’s not exactly shocking. But there are hints that the debt of some local governments may be threatening to spiral out of control: 12 of them saw their debts rise 20% or more. Plus, as China Real Time estimates, the report probably only covers 25-30% of total local government debt.

A sizable part of some local governments’ debt is dubious “shadow lending.” Nearly 16% of the total debt accrued by 13 local governments since 2010—$36 billion—came from trust loans and other sketchy financing, which channels lending off bank balance sheets. That could be higher—the report said financing through these channels is easy to conceal. It also noted that these are especially risky since rates tend to be much higher than those of banks—up to 17.5% annually. 

Nearly half of the local government debt came from local government financing vehicles (LGFVs). That’s worrisome because the report confirmed that the little-regulated LGFVs are much more problematic than headline debt. The LGFVs are investment proxies which local governments can use to take out loans, since they’re not allowed to issue bonds. But the LGFVs often use government-owned assets as collateral for the loans, even though they don’t actually own the assets. Their government affiliation also allows them to borrow at rates that ignore underlying risk, and to roll over existing debt. These old tricks aren’t working like they used to, though: the report found that 151 of these LGFVs lacked the income to cover 2012 debts owed, and another 37 actually reported losses.

Chasing old debt with new. As many have worried, a lot of new debt is going toward old loans instead of into the real economy. In 2012, of the debt payments for the 223 LGFVs surveyed, about $12 billion, or 20%, came from new loans.

Lots of fake assets in those LGFVs.  The report surveyed 223 financing platforms associated with the 36 surveyed governments. Here are some of the antics it uncovered:

  • Ninety-four LGFVs listed assets that “shouldn’t exist,” amounting to $146 billion—38% of total assets.
  • Five were missing some $9 billion in registered capital.
  • Six inflated their balance sheets with $6 billion in assets.
  • Three provincial-capital municipal governments illegally injected some $750 million in public parks, roads and other assets into their LGFVs’ balance sheets.