Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10. The total amounted to $622 billion, mostly in bank loans, more than the current size of the European bailout fund.
There are 6,576 such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan; 231 borrowers studied have amassed more than three-quarters of the overall debt.
The fact that so few of the companies have accumulated that much debt suggests a bigger problem, says Fraser Howie, the managing director of CLSA Asia-Pacific Markets who has written two books on China’s financial system.
“You should be more worried than you think,” he said. “Certainly more worried than the banks will tell you. You know how this story ends — badly.”
The findings suggest China is failing to curb borrowing that a central bank official has said will slow growth in the world’s second-largest economy if it is not controlled. With prices dropping in China’s real estate market, economists warn that local authorities won’t be able to repay their debt because of poor cash flow and falling revenue from land sales they rely on for much of their income.
Provinces and cities are going deeper into the red to finish projects, from the Manhattan on the east coast, to highways in northwestern Gansu and a stadium fronted by Olympic rings in Hunan, central China. Many were started as part of China’s stimulus program to beat the 2009 global recession. The financing companies accounted for almost half of the 10.7 trillion yuan in all local government debt tallied by the official audit.
The 231 borrowers whose public filings were reviewed by Bloomberg raised a combined 354.1 billion yuan by selling securities this year. They have credit lines from banks of at least 2.3 trillion yuan that have yet to be drawn down, the documents show.
Bank lending continues to rise, even after China’s banking regulator repeatedly warned banks to control risks associated with it and speed up repayment. Forty-seven of the 56 local financing companies that issued prospectuses from Oct. 1 through Dec. 10 said their debt load had increased this year. The combined debt of those issuers rose 10 percent from the end of 2010.
What’s more, adding up lending by bank also raises the question as to whether China’s lenders are understating their exposure to local government debt. Only 113 of the local government borrowers disclosed such a breakdown, yet this small group appears to account for an outsize portion of what the banks have said is their overall lending.