China: Lightning Audit Ordered for Local Governments

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Lightning Audit Ordered for Local Governments

Caixin
Auditors are fanning out to examine more than a decade of local government-related lending – and report by summer

(Beijing) – Central government auditors launched March 1 a strict, nationwide survey of provincial and municipal government debt programs, looking closely at risks involved in direct and indirect loans backed by local governments.

Auditors participating in the lightning campaign will trace loans issued over a 13-year period from 1997, when China rolled out an expansive fiscal policy to counteract a financial crisis spreading from Southeast Asia, through 2010, the second full year of an economic stimulus initiative that successfully spared China the worst of the global financial crisis.

The State Council recently ordered auditors to study local finances and return to Beijing in four months with a full report.

Ni Hongri, a research fellow at the State Council Development and Research Center, has several questions on his plate. ‘How much debt did local governments and their (financial) platforms assume after the recent stimulus plan?’ he asked. ‘How much banking and fiscal risk might these debts incur?

‘Policymakers need a clear picture before making the next moves on macroeconomic management or fiscal allocations,’ Ni said.

The National Audit Office dispatched 18 teams and mobilized 37 local audit bureaus to examine government books in 31 provinces and municipalities. They’re looking at loans made to, guaranteed by, or indirectly backed by local governments.

Funds for loans with indirect government backing usually come from local government financing platforms (LGFPs), government-affiliated agencies, and government-backed non-profit organizations. Credit agreements may not expressly say so, but local governments are generally expected to bail out borrowers that default.

Estimates vary for the amount of money loaned to local governments, with official and non-official institutions weighing in.

But outstanding loans to LGFPs alone had risen to 7.66 trillion yuan as of last June, exceeding the 7.1 trillion yuan raised through central government bonds. In addition, local governments have issued bonds worth 400 billion yuan via the finance ministry since 2008.
Lightning Audit Ordered for Local Governments_English_Caixin:

A full story will be published soon on Caixin Online.

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