China’s debt ‘time bomb’

China’s first audit of local government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) and warned of repayment risks, including a reliance on land sales and investment in stocks.

A total of 148 financing vehicles set up by regional authorities already had more than 8 billion yuan in overdue debt, while more than 5 percent of such companies used new bank borrowing to repay existing loans, according to an audit report posted on the National Audit Office’s website.

“Some local government financing platforms’ management is irregular, and their profitability and ability to pay their debt is quite weak,” Liu Jiayi, the country’s auditor-general said today, according to a transcript of his webcast. Some governments have offered illicit guarantees to such companies, while others rely on land sales to help them repay, Liu said.

Premier Wen Jiabao ordered the first audit of local-government borrowing in March, amid concern spending designed to support the economy following the 2008 global financial crisis would leave a legacy of bad debt. As much as 30 percent of bank loans are expected to turn sour and they are likely to be the biggest source of non-performing assets for the industry, Standard & Poor’s said in April.

Source: FinancialPost.com