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Local government debt accumulated over the past few years is relatively heavy, and some risks loom as certain regions and industries are weak in repaying the debt, according to a statement released by China's State Council after a meeting held on July 6 in response to international concerns over the massive debt burden of China's local governments. The repayment of debt and follow-up financing for projects under construction should be properly conducted, according to the statement.

Local governments' debt burden well below warning line

How heavy is the debt burden of China's local governments? According to a report released by the country's National Audit Office on June 27, local governments at the provincial, municipal, and county levels had amassed more than 10.7 trillion yuan of debt as of the end of 2010 and had repayment obligations for about 60 percent of the total sum. Only 54 county governments had zero debt.

The audit office has made great efforts to gain a clear picture of the debt load of local governments. In the first half of 2011, it deployed more than 40,000 auditors in the nationwide auditing of more than 79,000 local governmental agencies, 6,500 local government-backed financing vehicles, 370,000 projects and nearly 1.9 million lending agreements. It found that among the total local government debt, nearly 8.5 trillion yuan were bank loans. Certain regions had a debt ratio of more than 100 percent, and certain local governments were under heavy debt pressure from borrowing money to fund highways, hospitals, and colleges and universities,.

Will local governments be able to repay the debt exceeding 10 trillion yuan? Auditor-General Liu Jiayi said that local governments' debt burden has not gone beyond their ability to pay off.

Jia Kang, director of the Research Institute for Fiscal Science under the Ministry of Science, said that according to the Maastricht Treaty, formally known as the Treaty on the European Union, the government debt-to-GDP ratio must not exceed 60 percent. Given China's huge GDP, the 10.7-trillion-yuan debt of local governments is well below the warning line.

China's local government debt is made up of three types of debt: debt for which local governments have repayment obligations, contingent debt that local governments may need to pay and contingent debt for which local governments have obligations to render assistance. Local governments need to repay all of the first type of debt, and only part of the second and third types of debt, both of which are contingent debt. Even if local governments need to repay all of the 10.7 trillion yuan, the debt burden, which only accounts for over 20 percent of China's GDP, will still be below the warning line.

Related specialist agencies believe the 10.7 trillion yuan of local government debt has not exceeded the market expectations and is still controllable. Cao Honghui, director of the Department of Financial Markets under the Institute of Finance and Banking of Chinese Academy of Social Sciences, said that it will not cause systemic risk as long as China effectively deals with the non-standard and high-risk part.