HedgeFundLIVE.com — First time in history, we can have a chance to peek into the balance sheets of 31 Chinese provincial governments, major cities and counties. The National Audit Bureau is pressing the local governments to submit full audit reports by this June. The goal is to figure out the size of bad debts and future financial pressure of local governments. There has never been such an auditing before, on all levels of governments.
We don’t know any numbers now, but we know that the size of debt is huge, and the risk is probably high. Local governments are major investors in China, and they always borrow aggressively from local banks. However, they are not famous for being sophisticated in managing their investment risks (infrastructure projects, SOEs, any project the local officials like). Moreover, the cash flow to service their existing debt depends heavily on income from selling government lands to real estate developers. As the real estate market cools down, the pressure grows quickly.
We might see Chinese municipal bond market coming soon. There’s a long way to go. It would be painful for these local governments to disclose their financial information (They never have to), but eventually they will get over it.
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