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The Strictest Audit in History
Summary:China is undergoing a comprehensive audit of governments at all levels to get a grasp on how serious the debt situation is. Officials say that debts which were missed in previous annual audits will have nowhere to hide during this round.

By Zhang Xiangdong(
张向东), Chen Yong (陈勇),Shi Yaoyao(史尧尧),Peng You (彭友)
Issue 631, Aug 5, 2013

News, page 1
Translated by Zhu Na
Original article: [Chinese]

China’s largest scale government debt audit in ten years is currently underway.

This audit includes all levels from the central government down to townships, and also covers administrative work units.

On Aug 1, an official from the National Development and Reform Commission (NDRC) told the Economic Observer that the audit will discover the scale of nearly all debts related to government. A source close to the National Audit Office (NAO) said, “Finding out the real debt situation is the most important thing at the moment.”

The source said that this is a special audit authorized by the State Council, much like what was carried out in 2011, but it’s different from the routine annual audit. It will run from July 29 to Sept 30 and cover the debt situation from the end of 2012 to the end of June 2013.

The EO learned from several ministries and local governments that the audit might be in preparation for parts of China’s tax system reform; which includes improving transfer payments from central to local authorities, making better use of reserve funds at all levels and standardizing local government channels for borrowing.

The source close to the NAO said that the central government isn’t very clear on the scale of local government debt, and that a detailed understanding is needed. In recent years many local governments have launched large scale construction projects. It’s unavoidable that some have under-reported or not reported their debt, he said.

An official from the Shaanxi Provincial Development and Reform Commission told the EO that this audit will be the most accurate yet and catch those who’ve been misreporting. “During the last two audits, it was possible to hide some debts by shifting them to upper or lower governments,” the official said. “This time it’s impossible for them to transfer debts.”

An official from the NDRC said that in recent years, local governments have extended the scale and scope of their debts in order to spark investment and economic growth. Some debts formed directly through financing platforms, banking loans and other standard channels. Although these channels need to be further regulated, they’re at least relatively transparent and can be monitored. However, some debts have been raised through non-transparent channels, which makes them hard to catch in the routine annual audit.

The result of the 2011 special audit, which was conducted on provincial, city and county-level governments, showed that at the end of 2010 these three levels of government had total debts of 10.71 trillion yuan. However, only 4.97 trillion yuan, or 46.4 percent, was raised through transparent financing platforms.

The official from the Shaanxi Provincial Development and Reform Commission said that in spite of central government prodding to change their growth model, local governments still see developing the economy as the top priority. “Investment in construction, people’s livelihood [hospitals, schools, public transportation and other public services], infrastructure, water conservation and agriculture all need a lot of investment,” the official said. “But governments are short of financial resources year-by-year - especially in the first half of the year - and fiscal revenue has seen a significant decline. Local governments have to borrow and some have indeed over-borrowed.”

From November 2012 to February 2013, the National Audit Office did a random audit of 36 local governments’ debts since 2011. It showed that the ratio of debts to assets in nine provincial capital cities exceeded 100 percent, with the highest reaching 189 percent. These nine capital cities were Shijiazhuang, Shenyang, Changchun, Harbin, Hefei, Lanzhou, Xi’an, Wuhan and Kunming. In addition, the local governments had many cases of overdue payments and taking out new loans in order to pay off old loans.

Jiangsu Province is perhaps facing the biggest pressure. The EO learned that the province has 1.2 trillion yuan in outstanding debts, but in 2012, the fiscal revenue of all local governments amounted to just 502.6 billion yuan.

A source that’s long worked in Jiangsu’s finance system said that infrastructure must continue to develop in order to create demand and tax revenue to solve the debt problem. He also said that local governments’ fiscal spending consists on the one hand of salaries and medical care for civil servants, and on the other hand of hospitals, schools, public transportation and other public services. With residents’ living standards gradually improving, the government must increase investment in all these areas, he says.

He also points out that the cost of encouraging enterprises to invest is increasing “It’s not like in the past when you could just offer companies preferential tax and land policies,” he said. “Now they first want to see how much the government will invest in a project, then they’ll decide whether they’ll invest in the real economy. This requires huge fiscal expendiature.”



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