Debt audit reveals irregularities

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Irregularities involving a total of 531 billion yuan (US$84 billion) have been uncovered in China's local government debt, pointing to the need for further regulation of fundraising, China's top auditor said Wednesday.

Breaches of local government debt involved illegal guarantees for local debts, embezzlement and the operation of fake investment companies, the National Audit Office said in its report.

Last June, it was disclosed that local governments ran up 10.7 trillion yuan in debt - equal to about a quarter of China's annual economic output - over the past decade.

China's central bank has tried to allay concern about the debt load, saying its risks were manageable.

Huge stimulus

A large portion of that borrowing paid for projects that were part of China's huge stimulus after the 2008 financial crisis and for schools and other social programs that were promised but not financed by the central government.

The 531 billion yuan mentioned in the report included money that was handled in violation of government rules or earmarked for building projects that violated environmental or energy conservation guidelines.

After local governments canceled credit guarantees and took other corrective measures, the amount considered problematic was reduced to 272 billion yuan.

Among other violations, 35.1 billion yuan was spent on projects that were deemed too resource-intensive or polluting, the auditor said.

About 14 billion yuan of the embezzlement had been rectified, and nearly half of the total 531 billion yuan of irregularities put right.

"The State Council is studying proposals to enhance local government debt management and to address fiscal and financial risks," the auditor said.

Financing vehicles

The majority of China's local government funds are raised through local government financing vehicles, which were mainly set up to skirt limits that keep them from borrowing directly from banks.

Only Shanghai, Zhejiang Province, Guangdong Province and Shenzhen have been allowed to issue local government bonds on a trial basis starting last year to ease financial strains and to curb fast-spreading debt risks.

The auditor said that regulatory actions being considered by the State Council will include proper handling of existing local government debt, tighter inspection of local financial vehicles, and a system allowing local governments to raise money directly.

The auditor also said it had retrieved 8,353 low-rent housing units that had been illegally lent, sold, or granted to unqualified families.

Another 3,338 of 4,428 units vacant for a long time had been put back in circulation.