Local governments borrow heavily for stimulus plans

By Fang Yunyu Source:Global Times Published: 2013-5-6 23:53:01

In spite of escalating debts, some local governments have recently unveiled economic stimulus packages totaling more than 20 trillion yuan ($3.24 trillion).

At the end of last month, the People's Government of Zhejiang Province announced a massive investment blueprint for next five years, funding more than 1,000 major construction projects as a way to boost the economy.

The government said it expected fixed-assets investment to reach 10 trillion yuan, almost three times as much as the province's gross domestic product (GDP) last year of 3.36 trillion yuan.

Taken together with the stimulus plans launched by other governments, including Sichuan, Shanxi provinces and Guangxi Zhuang Autonomous Region, so far the total amount of local government stimulus packages is more than 20 trillion yuan, about 40 percent of the 2012 GDP of the world's second largest economy.

"In this slowing economy, some local officials are paying more attention to economic growth because GDP is a crucial indicator in assessing their performances, and their future promotions as well," Cao Jian­hai, director of the Institute of Industrial Economics of the Chinese Academy of Social Sciences, told the Global Times Monday.

China's GDP growth stayed at 7.7 percent year-on-year in the first quarter of 2013, its slowest rate since 1999.

Cao noted that such massive investment will surely push local government debts to new heights, and that Chinese governments usually borrow money from various sources, like bonds or bank loans, to fund construction projects.

But many experts view such practices as ticking time bombs, saying that an investment-led growth model is not a long-term solution for economic growth.

Dong Dasheng, deputy auditor-general of the National Audit Office, said at the two sessions in March that current government debts were at least 15 trillion yuan in total, and that local governments should be further restrained from borrowing money for construction investments.

But an economist, speaking anonymously, told the Global Times Monday that some officials are eager to turn to investment to boost the economy because there is massive corruption involved in construction subcontracting.

Cao said some governments are not likely to be able to pay back such massive debts.

Last month, Fitch Ratings downgraded China's long-term local currency Issuer Default Rating, one of its key ratings of Chinese government debt, noting that "risks over China's financial stability have grown."

"As the debts rise, money continues to inject into the market. Although the statistics show that inflation is mild, if you go to the supermarket or look at the real estate industry, serious inflation has already taken place in the country," Yang Zhirong, a financial analyst at the Dagong Global Credit Rating Co, told the Global Times Monday.

The People's Bank of China, the central bank, said China's M2 or broad money supply, which covers cash in circulation and deposits, stood at a record high of 103.61 trillion yuan in March, up 15.7 percent from the same time last year. The ratio with China's GDP is close to 190 percent.



Posted in: Economy

blog comments powered by Disqus