Storm warning

Beijing unleashes the auditors

Storm warning

The term ‘Blitzkrieg’ came about in 1939, as a new battle tactic in which German armed forces sought to sweep all before them with a ‘lightning war’ of Panzer tanks and Stuka bombers. In China a new term has gained currency in recent days: the ‘lightning audit’.

New Century Weekly reports that Beijing has decided to use shock tactics of its own in dealing with the problem of indebtedness of its local governments.

“Auditors participating in the lightning campaign plan to trace loans written over a 13-year period from 1997, when China rolled out an expansive fiscal policy to counteract a financial crisis spreading from Southeast Asia, through 2010, the second full year of an economic stimulus initiative that successfully spared China the worst of the global financial crisis,” the magazine reports.

Teams of auditors were dispatched earlier this month at the order of the State Council – the nation’s top decisionmaking body – and were told to return in four months with a clear picture of the province’s true debt situation.

WiC has reported extensively on the local government debt platforms – created to support stimulus spending (we first mentioned them in issue 48, last February). The central bank has already demanded that local governments disclose their off-balance sheet debt. But as we’ve also reported, details have not always been forthcoming.

This time a more forceful approach looks likely. The lightning audit involves 18 teams and 37 local audit bureaus, tasked to examine the books in 31 provinces and municipalities. Ni Hongri, a research fellow at the State Council Development and Research Centre, has several questions that he hopes the auditors will be able to answer, says New Century. “How much debt did local governments and their (financial) platforms assume after the recent stimulus plan?” he asks. “How much banking and fiscal risk might these debts incur? Policymakers need a clear picture before making the next moves on macroeconomic management or fiscal allocations.”

The main concern is that local governments have borrowed far too much, and that many projects will not be able to service their debts. The state-owned banks – which have lent to local government platforms based on bureaucratic guarantees rather than collateral or cashflow forecasts – might then have to take a big hit on their loan books. But no one, not even Beijing, knows the true scale of the potential exposure, it seems…

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