China orders 'urgent' audit of debts after IMF warnings

Andy Xie, a financial commentator at news website Caixin, said reliance on land sales to fund regional spending was an accident waiting to happen. ?While household income may have tripled in a decade, the average land price has risen by over 30 times. Income growth to come cannot justify the current price of land. Nor can a supply shortage. China has no shortage of land. The sustainable land value is probably 70pc to 80pc below current levels,? he said.

The IMF said these deficits ?raise questions about local governments? ability to continue financing the current level of spending and service their debts, which has implications for financial system asset quality. Further rapid growth of debts would raise the risk of a disorderly adjustment in local government spending. Financial distress would lead to a contraction in credit, a fall in domestic demand, and lower growth, which would make it more difficult for highly leveraged borrowers to grow out of their debt. The timing and coincidence of events that would trigger such an adverse feedback loop are difficult to predict,? it said.

An audit of the regions two years ago found that liabilities had mushroomed to $1.7 trillion (?1.1 trillion), but the full figure is already higher and rising fast as officials turn to the shadow banking system. Ma Xiaofang, a senior audit officer, said the chief worry is reliance on land sales to pay off half of all past debts.

The new audit comes weeks after a ?stress test? of Chinese banks caused interbank lending to seize up. SHIBOR lending rates have fallen back from extreme levels in late June, but borrowing costs remain high and there are signs of capital flight. Fitch Ratings said investors withdrew an ?unprecedented? $42bn from Chinese money market funds last month, many fearing the funds would run dry.

Richard Koo from Nomura said Beijing itself pushed regions into taking on more debt to keep growth going after the Lehman crash.

A third of local government debt cannot be repaid, yet officials are split over the wisdom of a central government bail-out.

The IMF said China will have to extricate itself from debt boom excess with great care, otherwise there could be a ?severe credit crunch? and eventually ?a systemic threat to financial stability?.

Source: http://telegraph.feedsportal.com/c/32726/f/568300/s/2f4e78b2/sc/2/l/0L0Stelegraph0O0Cfinance0Cchina0Ebusiness0C10A20A9560A0CChina0Eorders0Eurgent0Eaudit0Eof0Edebts0Eafter0EIMF0Ewarnings0Bhtml/story01.htm

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