Clarifying the debt risk

The thorough survey of the rapidly growing government-related debts speaks not only of the authorities' determination to deal with a key fiscal challenge that can and should be addressed timely.

More importantly, it marks a decisive step in China's pursuit of greater fiscal transparency and accountability, which are essential to its economic growth in the long run.

According to the latest report from the National Audit Office, China's government debts reached 20.7 trillion yuan ($3.4 trillion) by June 2013, among which 10.9 trillion yuan were piled up by local governments which also hold another 7 trillion yuan contingent debts.

A back-of-the-envelop calculation will put the government's debt-to-GDP ratio at about one-third, as the world's second-largest economy is expected to expand by more than 7 percent to exceed $9 trillion this year.

But compared with those triple-digit or high double-digit debt ratios of some developed countries, China's debt burden should surely not be of great concern. After all, the country's relative robust economic growth will considerably better prepare it for debt repayment than most heavily indebted rich countries that are hardly registering any growth at all.

However, the benign condition of the overall level of government debts does not mean that Chinese policymakers can lower their guard against the recent surge in government debt, the structure of which, many believe, may cause more problems than the size.

It is true that the expanded scope of the survey this time has made it difficult to gauge precisely how quickly the amount of local government-related debts has risen since they were reported to have totaled 10.7 trillion yuan by the end of 2010, direct and contingent together.

But a two-thirds increase over a period of merely two and a half years should be sufficient to justify alarm over the speed at which local governments piled up debts to fight the global financial crisis with massive infrastructure and urbanization projects.

Debt-fueled growth might have served as a needed emergence response in the past several years. Yet, as China moves to deepen economic reforms and pursue more sustainable growth, it is time to enhance the country's fiscal sustainability by improving budgetary transparency and accountability at all levels.

By clarifying the risks and responsibilities of outstanding government debts, Chinese authorities are clearly ready to press ahead with critical fiscal reforms.

(China Daily 12/31/2013 page8)