Chinese Local Government Spending Spikes Debt

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Source: http://www.flickr.com/photos/7964696@N05/

Source: http://www.flickr.com/photos/7964696@N05/

China’s local government debt increased to a staggering 17.9 trillion yuan ($2.95 trillion), according to a report by the country’s National Audit Office. The report, released Monday, shows an increase of 67 percent since the last audit was completed three years ago, The Wall Street Journal reports.

Economists worry that if multiple local governments across China have to borrow money, the entire financial system in China could need a bailout. The large, state-controlled banks would be hit particularly hard if borrowing rises and economic growth slows.

Numbers crunched by the publication place the overall debt for the country within 60 percent of gross domestic product, with China’s liabilities being 53.3 percent of its GDP. The 60 percent debt-to-GDP ratio is an internationally accepted standard and “represents a sound target for stabilizing the debt in the medium term,” according to the Committee for a Responsible Federal Budget.

Louis Kuijs, chief China economist at Royal Bank of Scotland Group in Hong Kong, told Bloomberg the ballooning of debt “is a very sizable build-up and it’s the kind of build-up that is not sustainable. It’s expanding at much too rapid a rate.”

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