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China state auditor warns over local government debt levels

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(Globalpost/GlobalPost)

BEIJING (Reuters) - China's state auditor warned on Monday that debt levels among local governments are rising and the financial burdens and risks are not being properly managed, adding to concerns over the health of the country's financial system.

The National Audit Office, responsible for overseeing state finances, said in a report that the total debt at 36 local governments had risen 13 percent to stand at 3.85 trillion yuan ($627.70 billion) at the end of 2012 from two years before.

Debt levels had risen as much as over 20 percent in some of the areas surveyed, it said, requiring "effective measures to strengthen debt management" and the establishment of an early-warning mechanism to effectively guard against risk.

The report highlighted a number of problems needing "corrective measures", including a lack of debt management systems and regulations, illegally arranged debts and improper use of funds and falling revenues that could impact the ability to repay.

Many Chinese local governments have embarked on spending sprees on big infrastructure projects since the state handed out cash in the wake of the 2008/09 financial crisis to pump up the economy.

Concerns have grown that the debts incurred could sour as many infrastructure projects in China are for public use and not profitable. Many local governments have also borrowed from companies in private arrangements at high cost, with the money often used in speculative real estate projects.

Estimates of local government debt range from Standard Chartered's 15 percent of the country's GDP at end-2012 to Credit Suisse's 36 percent. Fitch put the figure at 25 percent when it downgraded China's sovereign debt rating in April.

The national government has made trying to regulate local government debt a top policy priority.

The audit office report said some of the local governments surveyed are obligated to repay as much as 189 percent of some of the amounts borrowed, and have an over-reliance on income from land and highways.

It also noted problems in some areas of illegal guarantees with overstated values for collateral, illegal financing and changes to the original purpose of the debt issuance, as well as idle funds.

It said the 36 localities audited included the cities of Tianjin, Shanghai and Guangzhou as well as provincial level governments and local municipalities across the country. ($1 = 6.1335 Chinese yuan)

(Reporting by Jonathan Standing; Editing by Sanjeev Miglani)

http://www.globalpost.com/dispatch/news/thomson-reuters/130610/china-state-auditor-warns-over-local-government-debt-levels