In the wake of the US subprime mortgage crisis in 2008, China rolled out a stimulus package, which provided for a massive round of infrastructure investment on projects nationwide, meant to prevent its economy from falling below the 8-percent growth mark. As a result, debt levels at local governments surged sharply and have continued to increase rapidly ever since.
Statistics show that new debts owed by local government financing vehicles in the first 10 month of last year amounted to nearly 600 billion yuan ($96.25 billion), above the 150 billion yuan in debts these vehicles racked up during the whole of 2011. The way things are going now, it seems like China's economic growth is becoming more and more reliant on borrowing.
At present, the public is upbeat about the prospect of China's urban development, which is expected to stimulate domestic consumption and fuel economic growth. Yet, investment in infrastructure is a prerequisite for urbanization. Thus, it is inevitable that many cash-stripped local governments nationwide will take on more debt soon to achieve their urbanization goals.
The author is Li Xunlei, chief economist at Haitong Securities.