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Detroit bankruptcy puts local govts on alert

By Yang Jingjie Source:Global Times Published: 2013-7-20 0:53:01

Detroit has filed the largest municipal bankruptcy in US history after decades of decline and mismanagement rendered the cradle of the nation's auto industry insolvent.

Detroit's request for bankruptcy also prompted observers to call for Chinese local governments to be on the alert over their expanding debts, though they believe the central government won't allow any insolvency due to the difference between the Chinese and US systems.

The city's bankruptcy, if approved by a federal judge, would force Detroit's thousands of creditors into negotiations with the city's Emergency Manager Kevyn Orr to resolve an estimated $18.5 billion in debt that has crippled Michigan's largest city.

Michigan Governor Rick Snyder Thursday said he saw no other options for Detroit and approved Orr's request to file for Chapter 9 bankruptcy protection.

Detroit's creditors are expected to face huge losses, and the future of retiree pension and health benefits for thousands of city workers hangs in the balance.

Detroit has lost 25 percent of its population in the last decade, with 700,000 residents remaining. The ranks of retirees outnumber active workers by more than 2 to 1.

White House spokeswoman Amy Brundage said US President Barack Obama and his team were monitoring the situation in Detroit closely.

General Motors, the only major US automaker headquartered in Detroit, said in a statement that the company "is proud to call Detroit home and... [This is] a day that we and others hoped would not come. We believe, however, that today also can mark a clean start for the city."

Detroit's insolvency rings alarm bells for China's local governments, which have accumulated excessive debts over the past years.

The National Audit Office in June released an audit of holdings at the end of 2012, showing that local government debts had reached 3.85 trillion yuan ($627 billion), up 12.94 percent or 440.9 billion yuan from 2010.

Jiang Yong, director of the Center for Economic Security Studies at the China Institutes of Contemporary International Relations, Friday told the Global Times that governments at the local level should be cautious in dealing with the massive debts, noting their reliance on land sales and land mortgages to repay the debts are risky.

"Once the property bubbles burst, they won't be able to make the repayment," Jiang warned.

Ni Hongri, a research fellow with the Development Research Center under the State Council, told the Global Times Friday that though the local debts in China are still controllable through the central government's administrative measures, systemic reforms are needed to reverse the trend.

Despite the warnings, experts believe that local government debts in China would not result in a bankruptcy of local governments as was the case in Detroit.

"My view is that the comparison of Detroit and China is totally false and doesn't understand that China is essentially an integrated financial system. The US is not," John Ross, a senior fellow with Chongyang Institute for Financial Studies at the Renmin University of China, told the Global Times Friday.

Chen Chenchen and Reuters contributed to this story

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