Economists warn of high local govt debt

By Aug 2, 30 provinces, municipalities and autonomous regions had issued reports concerning their fixed-asset investments in the first half of the year. Of those, 26 saw their investments increase at a rate that was faster than the national average increase, according to China Enterprise News, a newspaper run by the China Enterprise Confederation and Chinese Enterprise Directors' Association.

The southwestern province of Guizhou saw its fixed-asset investment increase by 58.1 percent year-on-year. Shanghai, in contrast, recorded a growth rate of 4.5 percent.

The newspaper quoted an official in the National Development and Reform Commission as saying that even though the central government has no plans to adopt a stimulus package similar to the one it had in late 2008, local governments have come up with their own versions of financial stimulus.

Much as Beijing did a few years ago, many local governments' stimulus spending is going into large-scale public-works projects.

"We may be racing recklessly toward an abysmal state of government indebtedness," Ye Tan, an independent business commentator, told the newspaper National Business Daily.

She noted that 24 cities introduced ambitious urban development investment programs from June to July. Those have a combined budget of almost 500 billion yuan.

On July 25, Changsha, capital of Hunan province, introduced plans to make various important investments. The city listed 195 projects, which are expected to be undertaken at a cost of nearly 830 billion yuan.

Many economists expressed reservations about the "4 trillion-yuan program 2.0".

According to Zhao Xiao, an economics professor with the Beijing Institute of Technology and a former National Development and Reform Commission official, Chinese local governments' debts increased by as much as 40 times in 13 years, hitting 10.7 trillion yuan by the end of 2010.

Much of that spending has been slow to generate significant returns and is therefore considered to be largely unsustainable, Zhao said.

Local governments' stimulus plans are likely to lead to even worse overcapacity in some industries and even worse government debt, he said.

Zhao cited research suggesting that China's credit-to-GDP ratio is now as high as 123 percent, higher than that of the United States, whose credit-to-GDP ratio is about 60 percent. In 2012, local governments' debt-to-asset ratio is expected to exceed the danger point of 20 percent, increasing to as much as 26.6 percent.

China will have to pay a high price, Zhao warned, for its twisted and lopsided understanding of Keynesian economics.