RPT-China details $3-trillion local public debt risk

Mon Jan 27, 2014 6:52am EST

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* Jiangsu, Guangdong, Sichuan govts most indebted -audits

* Debt-to-GDP ratios highest in Guizhou, Chongqing, Yunnan

* Inner Mongolia says 28 pct of debt overdue but not paid

* Gansu, Shandong, Shanxi, Jiangxi have 8 to 10 pct of overdue loans

BEIJING, Jan 27 (Reuters) - China's local governments have published separate audit reports detailing their combined public debt of $3 trillion for the first time ever, to increase transparency and quell investor concerns.

The audits showed China's wealthiest eastern provinces are the most indebted, though repayment burdens are more onerous in poorer areas such as the southwestern province of Guizhou, where the ratio of debt to GDP is the highest, at 79 percent.

Most governments were shown repaying the vast majority of their debt on time, though a handful, such as Inner Mongolia, have fallen behind, with the portion of loans due but unpaid running as high as 28 percent.

The burst of transparency follows criticisms from some experts this month that China was not releasing enough information about its local debt troubles, widely regarded by investors as the biggest threat to its $9.4-trillion economy.

"The issues are the most pertinent in the poorer parts of the country," said Louis Kuijs, an economist at RBS in Hong Kong. "Those parts of the country have difficulty repaying their debt."

Spurred by the need to sustain brisk growth in the world's second-biggest economy, Chinese local governments have borrowed heavily over the years to fund non-lucrative public works such as sewage systems and railway lines.

Though some analysts welcome the public works and say China is right to build its infrastructure now before costs escalate as its economy grows, others worry that rapid investment has generated waste and sowed the seeds for bad loans.

Audit statements from 30 of China's 31 local regions, provinces and municipalities showed the governments of Jiangsu, Guangdong and Sichuan are the three most indebted, with Jiangsu borrowing the most, at 1.5 trillion yuan. Tibet was the only region that did not release an audit report.

In terms of total debt as a portion of local gross domestic product, however, Guizhou, Chongqing and Yunnan led the league.

The Beijing local government was at the top of the table in terms of money borrowed as a percentage of annual fiscal income at 100 percent, followed by Chongqing's 93 percent and Guizhou's 92 percent.

For a table of local government debt levels, please click on

WORRISOME BUT NOT A CRISIS

China released its most comprehensive audit of local government finances last month in response to mounting investor scepticism that its local debt problems are worse than official numbers suggest.

The report showed debt surging 67 percent in two years, far more than officials had publicly admitted.

But analysts said it did not suggest China was on the verge of a crisis as total government debt is worth around 58 percent of the economy, far from the levels of Greece and Japan, where public finances are strained.

Fears that China may suffer higher bad debt levels imperilling its financial system were compounded in the past two years by its cooling economy, where growth narrowly missed a 14-year-low forecast in 2013.

The audit reports showed a handful of governments were struggling to repay some loans. Inner Mongolia seemed to be under the most strain, with overdue loans that have not been paid making up 28 percent of total debt.

The governments in Gansu, Shandong, Shanxi and Jiangxi also reported that unpaid loans accounted for between 8 and 10 percent of total debt.

Standard & Poor's expects 30 percent of bank loans to local Chinese governments to sour if borrowers are not aided by other authorities, the rating agency said in a report last week.

"Nonetheless, we don't see an imminent risk of a systemic crisis from local government debt," it said, adding that China's banks are buffered by strong profit growth. (Reporting by Koh Gui Qing and Shao Xiaoyi; Editing by Clarence Fernandez)

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