China’s external debt reached highest since its economic reforms in 1985. This has happened even as debt-ridden local governments have been barred from issuing bonds directly to raise revenues.

The rising debt is adding to concerns whether it may undermine China’s fiscal position and cause economic harm, a report in the China Daily said today.

According to data released by the State Administration of Foreign Exchange (SAFE), the country’s total debt increased by 8.1 per cent from $695 billion three months earlier to $751 billion.

The proportion of short-term debt rose to a record high of 74 per cent, well above the international alert level of 25 per cent, the Daily report quoted.

SAFE said the increase in short-term debt is closely related to the rapid development of China’s foreign trade.

Meanwhile, China has halted plans to allow local governments to issue bonds directly, as policymakers increase their scrutiny of regional debt risks and call for improved fiscal management at the local level.

The central government will continue to sell bonds on their behalf, official media here reported.

According to National Audit Office, the provinces’ debt was stated to be around 10.7 trillion Yuan ($1.68 trillion) by the end of 2010, in which local governments are responsible for 70 per cent of the debt repayment.

Some experts have expressed concern that the cancellation of direct debt issuance will put local authorities under greater financial strain.

Mr Jia Kang, director of the Finance Ministry’s Fiscal Science Research Centre, said the move does not reflect the actual requirements under current economic conditions.

“It is imperative to open the bond market to local governments as a proper financing channel. It is also a chance to prevent further hidden debt and prevent risks,” China Daily quoted Mr Jia as writing in his micro blog.

But now that the door is closed, local governments will face increasing fiscal constraints from decreasing land sale revenues and increasing expenditures on people’s livelihoods, Mr Xiang Songzuo, Chief Economist of Agricultural Bank of China Ltd said.

“Expanding financing channels for local governments and letting them be responsible for their own debt repayments is a basic direction of China’s fiscal reform, and that should not be changed,” Mr Xiang said.

However Mr Ye Yanfei, Deputy Head of the Statistics Department of the China Banking Regulatory Commission, said the new move will barely affect the repayment of current loans made to local governments through financing.

(This article was published on June 27, 2012)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.