Chinese Local Government Debts Nearly Equal National Tax Revenue

March 28, 2013 Updated: April 1, 2013

On March 24, Lou Jiwei, China’s new Minister of Finance, stated during the China Development Forum that the current Chinese local government debt amounts to 11 trillion yuan ($1.77 trillion USD), which was nearly equal to the tax revenue of the entire country for 2012. 

Lou Jiwei admitted that China is facing expenditure pressures and said the regime has promised to streamline the budget—and though he made no mention of tax increases, Chinese media reported that the Ministry of Finance and the State Administration of Taxation are drafting amendments to increase sales taxes on luxury goods, non-luxury items, energy-intensive products and items that cause pollution.

Lou Jiwei also said that the Ministry of Finance is investigating local government debts based on statistics provided by the Audit Office. The 11 trillion yuan of debt will be categorized into explicit, implicit, and direct debt, and then analyzed for potential risks so that appropriate measures may be adopted to curb the dangerous trend of debt expansion in local governments. 

The “Audit Result of Local Government Debt” issued by the Audit Office, shows that 53 percent of the local debt will come due by the end of 2013. This is regarded as a clear indication that China’s local debt crisis will become more obvious throughout the year, according to a report last year by the 21st Century Business Herald, a popular business newspaper in China.

What are the possible implications of such a massive debt? According to the State Administration of Taxation, the total national tax revenue of 2012 was just over 11 trillion yuan, which means that it can potentially take an entire year of national tax revenues to pay the local government’s debts.  

Economist Larry Lang stated at the recent 2013 China Regional Economic Development Forum, that since April 2012, many local governments, including Yunnan Province, Sichuan Province, and Shanghai, have been defaulting on their debts. This kind of debt crisis could lead to a bank crisis in China and thereby to a broader financial crisis. 

Wu Fan, editor-in-chief of China Affairs magazine, told The Epoch Times that the chance of a full-blown financial crisis in China is increasing. According to Wu, many local governments are unable to pay the principal, much less the interest. Some are even unable to collect taxes. Local governments have thus resorted to extortionist tactics to wring money from the public, while the central government has been expanding credit, which simply worsens the problem, Wu said.[related-left]

Read original Chinese article.

Translation by Amy Lien. Written in English by Barbara Gay.