Get caught up on Chinese local debt levels and join the bears

Why does China start to audit local government debt again?
So here comes the next question, why wasn't this VIP satisfied with the last audit report? This table below can show you that the second audit was far less comprehensive than the first one and it is extremely doubtful whether the sample of 36 local governments can reflect the whole picture. In fact the last report could be misleading in many ways.

Why do I say this? The growth rate of debts in 36 local governments was 12% in the last 2 years, while it was on average 30% annually in the first decade of this century. If we believe the sample of 36 local governments is representative then we will see a very positive picture as local government debt growth has slowed down significantly in the past two years while GDP growth continued to be high. The first NAO report said that total local government debt was 10.7 trillion yuan and if we apply the 12% growth rate here, total local government debt would be 12 trillion yuan by the end of 2012, accounting for 23% of GDP, smaller than the ratio of 25% in 2010.

That local government debt totalled 12 trillion by 2012 simply looks too good to be true. Even the auditors themselves won't believe it. Dong Dasheng, deputy minister of the National Audit Office, said in May the latest debt scale for governments at all levels was between 15 to 18 trillion yuan, while Xiang Huaicheng, a former finance minister, said in April China's local governments might have already borrowed more than 20 trillion yuan. Three years after the government started the first audit, the total local government debt number still looks like a black box!
Or not. Which is why a second audit was ordered. Read Why does China start to audit local government debt again? for a much longer discussion of the issue.

So far there have been two audits. One completed in June 2011 and one in June 2013. Both were periods of bearishness in China, with real estate topping in June 2011 before major slowdown fears combined with the U.S. debt ceiling debate and euro crisis in late summer. By autumn 2011, Shanghai real estate customers were smashing real estate offices and by December, the yuan was falling versus the dollar. This year we saw China combine with Fed taper talk during a bearish episode for world markets across all asset classes. Today, stocks fell on news that a full audit will be conducted (the prior audit only covered 15 provinces, their capital cities, the municipalities of Tianjin, Shanghai and Guangzhou, and one district from each municipal city).

China orders audit of local govt debt
The government announced the audit in a one-sentence statement on Sunday. The ruling Communist Party's main newspaper, People's Daily, said the Cabinet sent an "urgent message" ordering the audit and telling local audit officials to suspend other work until it is completed.

Larger image here.

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