China to punish local officials for excessive debts

China will link local officials’ performance appraisals to the level of debt held by local governments, state media reported Monday, an apparent move to cap borrowing and address worries that possible defaults could damage China’s economy.

The China Daily cited Yuan Shuhong, deputy head of the Legislative Affairs Office of the State Council, China’s cabinet, as saying that the political outlooks of local leaders would dim if governments borrowed excessively during their terms of office.

Yuan did not mention any caps on government borrowing or go into details of how local officials would be penalised.

China has intensified its efforts to clean up local government debts, including holding a cabinet meeting chaired by Premier Wen Jiabao last week, after the nation’s state audit office put the total amount of debt at 10.7 trillion yuan ($1.65 trillion) as of the end of 2010, including 8.5 trillion yuan of loans from banks.

That bank lending number may have been underestimated by 3.5 trillion yuan, ratings agency Moody’s said last week, potentially putting banks on the hook for deeper losses that could threaten their credit rating.

Massive debts would probably increase forced land seizures by local governments looking to raise money, Yuan warned. China’s local governments are heavily reliant on land sales to finance their debt payments.

The National Audit Office said last month that China’s local governments had used land as collateral for 2.5 trillion yuan, or 23 percent, of their debts by the end of 2010. ($1 = 6.465 Chinese Renminbi)


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