According to Economic Information, a publication under Xinhua, China’s National Audit Office conducted an investigation into local government debt. It found that local government debt almost doubled since the 2011 audit. The nationwide investigation started in August and is nearing completion.
The officials from the National Audit Office indicated that the increase is largely the result of the build and transfer financing strategy (BT) in which the local government establishes a project and then authorizes construction companies to finance and build it and then transfer it back to the government. Since local governments are not authorized to issue bonds, financing platform companies, set up by local governments, have been instrumental in obtaining financing or issuing bonds to the public. In some cases, the interest rate has reached 14 percent.
The 2011 national audit showed that, as of the end of 2010, local government debt exceeded 10 trillion yuan (US$1.63 trillion). Most financing platform companies were set up by provincial and municipal governments in the developed regions. However, the ongoing investigation showed that almost every country government now has its own financing platform. “It is literally the ATM of the central bank,” said an official of the National Audit Office. These financing platform companies hold assets of very low market liquidity and have no ability to pay off these debts. Many of them are in the red.
Source: Economic Information reprinted by China Daily, September 27, 2013 http://www.chinadaily.com.cn/hqgj/jryw/2013-09-27/content_10207613.html