China to take up nationwide audit of government debt

China plans to initiate a nationwide audit of government debt this week after the new Communist Party leadership reviewed the threats to the country's growth and the financial system that hasd so far enjoyed a record credit boom.

The Chinese National Audit office said in a statement yesterday that the State Council, under premier Li Keqiang, had ordered the review.

So far, conducting the review has led to suspension of other projects for the ''urgent'' work requested on 26 July. The State Council would send staff to provinces and cities this week, People's Daily reported yesterday on its website, citing sources it did not identify.

According to the International Monetary Fund, risks were increasing that China's growth this year would fall short of the lender's forecast, due to risks from borrowing by local governments and an expansion of non-traditional sources of credit.

Chinese stocks were down with the first full audit in over two years highlighting dangers to the economy from borrowings by local governments. Under the gaze of the new leadership, the People's Bank of China has forced a cash squeeze pressuring banks to better manage their liquidity and assets, leading to the emefgence of an expansion of non-traditional sources of credit.

Local governments in China borrowed heavily in the wake of the global financial crisis in a bid to sustain growth rates.

According to the last audit published in 2011, the combined debt of local governments was around 10.7 trillion yuan ($1.7 trillion) by the end of 2010.

Debt poses a risk to China's growth as there are growing fears that local governments might fail to repay.

In a statement on its website, the national auditor said, "In line with a request of the State Council, the National Audit Office (NAO) will organize auditing agencies across the country to carry out an audit of government debt."

A substantial portion of the local government borrowings had been taken up following the global financial crisis as Chinese authorities released a 4 trillion yuan fiscal stimulus.

The China Banking Regulatory Commission, put the portion the local governments had taken up at 80 per cent of total bank lending in China at the end of 2010.

Greater transparency would come as a welcome development especially as the new government could do a bit of housecleaning as anxieties grew over the ability of the company to manage its debt, according to commentators.

A part of the borrowings went into infrastructure projects, such as road and rail touted as vital to sustain orderly economic development and some of it was also spent on property construction.

Fears had been voiced all along that the projects may not be financially viable over the long run.