Editorials

Local financial scars

(China Daily)
Updated: 2010-04-07 07:58

Editor's note: It is time for the central government to pay more attention to the excessive debt of local governments and measures should be taken to ease their pace of investments.

China's economic growth may be piling it on, but so is the worrisome debt from local governments, enough to be a major concern for policymakers.

Though the zeal to invest from local governments has helped the country's overall economy rebound, it seems that local governments have done so with reckless abandon.

In 10 out of the country's 31 provincial regions, the total debt of local government investment agencies had reportedly exceeded local gross domestic product. There were no exact numbers on how much these finance arms of local governments were in debt to banks, but apparently the investments accounted for a very high proportion of bank lending last year.

With these latest reports, isn't it about time that the government paid a little more attention to the rapid buildup of local government debt?

The heavy burden of debt on local governments sharply contrasts with the country's overall fiscal outlook. China's fiscal deficit hit 950 billion yuan last year, a record high in six years, but still less than 3 percent of GDP. If their rapid buildup of debt was a countermeasure to the crisis last year, local governments should now stop borrowing heavily.

After growth rebounded to 10.7 percent in the final quarter of 2009, the overall economy is expected to grow by about 12 percent in the first quarter.

Under these conditions, the central government should consider how to ease off its stimulus measures. Similarly, local governments should temper their pace of investments in infrastructure projects to ease concerns about both waste and debt.

Issuance of local infrastructure bonds surged to more than 200 billion yuan in 2009 from 40.6 billion yuan in 2008.

This excessive financing for local governments will not be sustainable for both local governments and the banks, especially when the country has to tighten credit to stem inflation.