China’s National Audit Office has revealed that many local governments are continuing to raise funds in breach of regulations despite heavier scrutiny from Beijing, leading to a rapid rise in debt levels.
Concerns over local government debt prompted Beijing to impose heavier regulation of local government borrowing over the past two years following the release of a new budget law in 2015.
Curbing China’s local government debt has proved highly difficult, however, with NAO head Hu Zejun revealing that government debt is still growing rapidly in certain areas due to borrowing in breach of regulations.
According to NAO the outstanding balance of debt that government has committed to repaying increased by 87% by the end of March 2017 as compared to end of June 2013, with some counties and as well as regions in the far West seeing debt levels more than double.
Their data indicates that since 2015 a total of seven provinces, six municipalities as well as five counties had inappropriately raised 53.719 billion yuan in debt that the government has committed to payback using its own funds, by means including bank loans and entrusted financing.
While figures from the Ministry of Finance indicate that China’s total local government debt stood at 15.32 trillion yuan as of the end of last year, for a debt rate of 80.5% , local governments continue to use a slew of other covert methods to borrow, including government investment funds, counterfeit service purchases and false public-private partnerships.
NAO looked in particular at 235 government investment funds established across 16 provinces at the end of 2016, and found that government departments directly appointed management companies for 122, as well as 347 senior executives or investment committee members at a 103.
Measures introduced to support small businesses are also frequently used by local government as a covert means for illicit fund-raising, with as much as 89% of the 3.159 billion yuan in small-business funds that NAO sampled being diverted to purposes beyond those designated by policy.
In order to remedy the problem of illicit funding by local government, NAO recommends focusing on prevention hidden risk sources emerging in areas such a local government debt, non-performing assets, bond defaults, shadow banking and Internet fiancé, as well as a strengthening of risk assessment, early warning and emergency response measures.