Local Chinese Governments Panic Over Impending Audit

August 13, 2013 Updated: August 13, 2013

Local Chinese governments, state-run enterprises, and financial organizations are panicking over an audit announced in late July to be sweeping the nation, according to reports.

Once local government debt is exposed, many investments in large projects may face the risk of suspension which would trigger breaches in numerous contracts inked by officials and businessmen, experts told China Times, a state-affiliated newspaper.

“Local government officials are afraid of bad consequences from the audit. They can’t allow a breach in investment contracts or bad debt,” a source in the Guangdong local government told China Times. The man indicated that many financial organizations have hidden debt problems, especially in large projects for construction, city development, and real estate.

China’s Audit Commission announced on July 28 the formation of a new administration to audit all local government debt, expected to begin work in early August.

A bank manager in Guangzhou, surnamed Xiao, told the China Times that his superior had spoken to him about the audit, giving further details not mentioned in the Audit Office’s announcement. The superior said that the regime was launching a comprehensive review to assess local debts, with a special focus on debts resulting from large real estate and city development projects.

For years Chinese local governments have developed new towns and cities, or launched massive infrastructure projects, using borrowed money. The projects are used to bolster economic growth figures, but commonly raise no revenue and many become “ghost towns,” saddling local governments with vast amounts of debt.

China has at least twelve ghost cities—large, uninhabited areas with real-estate few can afford or want—including the Ordos Kamba area of Inner Mongolia, the Zhengdong New Area in Henan Province and others.

Residents in many cities are also at risk of being forcibly evicted so that their land can be sold for real-estate development.

Taiwan’s Central News Agency says that by the end of 2012, the debt of 36 local governments totaled up to almost 3.85 trillion yuan ($628.9 billion), citing a Chinese National Audit Office report. Almost eighty percent of the balance was in bank loans, and audit officials estimated that banks had loaned governments up to 3 trillion yuan ($490 billion).

To prevent further debt, some local governments have begun suspending large construction projects, including real-estate investment, according to China Times.