True size of local debt

The government's decision to launch a nationwide audit of local government debt sounds the alarm that the problem can no longer be ignored.

The National Audit Office said it will halt all other projects to concentrate on the audit, which is due to begin next month.

Although the NAO did not reveal any more details, it is clear that the central leadership wants to know the extent of local government debt, which already amounted to 10.7 trillion yuan ($1.7 trillion) in 2010.

There are concerns that the debt will cause serious financial problems if they continue to pile up.

According to the results of the NAO's selected auditing of 36 local governments, which were released in June, the debts of those governments had reached 3.85 trillion yuan by the end of 2012, up 13 percent from the 2010 level.

Although it is hard to accurately estimate the total local government debts nationwide based on the selected audits, the fast growth rate of the 36 selected is alarming. It shows that local governments have continued to borrow heavily since 2010.

It is fair to say that the borrowing by local governments in the aftermath of the global financial crisis in 2008 played an important part in shoring up the national economy at that time. But it is unacceptable that such borrowing has continued.

When the national economy fares well, local governments can pay back their debts through the normal operation of the special-purpose vehicles they formed to borrow money.

But as the economy slows, it will become difficult for those financing vehicles to repay the debts and there is a growing risk of defaults, which would cause stress in the banking sector and ultimately nationwide financial turmoil.

China's economic growth has slowed to 7.5 percent year-on-year in the second quarter, and things could get worse in the coming quarters. More dangerously, as a senior official admitted this month, policymakers do not know exactly how much money local governments have borrowed so far.

The move to have a thorough audit of local government debt is essential if the central authorities are to grasp the real scenario and take appropriate countermeasures to prevent a financial crisis from materializing.