China likely to manage local government debt

China will likely be able to manage its local governments' massive debt due to the strength of the country's fiscal revenues, a financial report said Monday. The Chinese National Audit Office said in June that the country's local government debt reached 10.7 trillion yuan (US$1.65 trillion), equivalent to 27 percent of the country's 2010 gross domestic product (GDP) estimated at 39.8 trillion yuan. Some experts in the private sector, however, estimate the total debt at around 14 trillion yuan. "Whether it be 10.7 trillion yuan or 14 trillion yuan, the scale of local debt is still manageable," said Qu Hongbin, chief China economist at HSBC, in a report. Total public debt, which combines the debt of the central government and that of local governments as a share of total government revenue, remains low, while fiscal revenue is growing strongly, the British bank said. China's government as a whole recorded total revenue topping 8.3 trillion yuan last year. "The total central and local debt of 20.8 trillion yuan is about 2.5 times the total government revenue in 2010. This is far better than around 6.5 times for the U.S.," the HSBC economist said. Government revenue grew 30 percent on-year in the first half and is likely to top 10 trillion yuan this year, which means the total debt-to-revenue ratio is likely to fall by half at the end of this year, he said. HSBC warned, however, China could face a liquidity problem, with a mismatch between the maturity structure of the debt and the payback period of the investments. More than 50 percent of local debt is set to mature by the end of 2013, and another 17 percent will mature between 2014 and 2015, according to the bank. "However, as more than 70 percent of the debt has been used to finance long-term infrastructure projects whose payback periods are much longer, this implies that it will be difficult for these projects to generate sufficient cash flows in the next three to five years to repay local loans," Qu said, stressing that Chinese authorities would need to take decisive action to restructure local debt. HSBC said issuing municipal bonds will be the best option for the Chinese government to choose, letting the local governments use the proceeds to pay back bank loans. The new bonds will open the door for local governments to issue new debt to repay old debt, mitigating the risk of bank defaults. The bonds will also create channels for local governments to raise funds needed for future infrastructure investment in a more transparent and market-based fashion, the HSBC report said.