Local debt concerns

The Chinese Finance Minister has said the country's county-level governments have seen their fiscal conditions improve significantly.

While this news offers some cause for relief, policymakers should not let their guard down amid the persistent debt burdens that local governments find themselves laboring under.

Things have gone smoothly in China's use of a fiscal-guarantee mechanism to ensure that county-level governments have the resources they need to carry out their duties, Xie Xuren, minister of finance, told national lawmakers on Wednesday.

Since 1994, when the country reformed its tax distribution system in a way that caused more revenue to go to the central government, local governments have complained that they lack the resources they need.

The concerns have only become stronger in recent years, leading some local governments to collect fees in what appears to be an arbitrary manner. Many such governments have also taken to borrowing large sums to make up their deficits, becoming heavily indebted as a result.

By the end of 2010, local governments in China carried about 10.7 trillion yuan ($1.7 trillion) in debt, according to official auditing results.

Even so, their fiscal conditions have improved, largely thanks to fiscal transfers from the central government and an increase in tax income, the finance minister said.

In the first seven months of the year, 3.29 trillion yuan was transferred from central coffers to county-level governments, more than 80 percent of the yearly target, the minister said.

Still unknown to the public, though, is the amount of debt these governments carried on their books by the end of 2011, making it difficult to tell if they truly have become less indebted. Debt troubles often come to the fore when general economic conditions worsen, as the recent histories of many Western countries have shown.

A continued deceleration in China's rate of GDP growth will only threaten to make the indebtedness of grassroots governments more harmful to the economy.

Policymakers, therefore, should avoid letting the apparent improvement in county-level government's accounts lull them into complacency.

(China Daily 08/30/2012 page8)