Beijing: The spectre of massive local government debt threatens to haunt China, with a senior Chinese auditor warning that the debt is "out of control" and could spark a bigger financial crisis than the US housing market crash.
"We audited some local government bond issues and found them very dangerous, so we pulled out," Zhang Ke of accounting firm, ShineWing, told Financial Times
Zhang, who is also vice-chairman of China’s accounting association, said "most don’t have strong debt servicing abilities. Things could become very serious".
Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis.
Provinces, cities, counties and villages across China are now estimated to owe between RMB 10-20 trillion (USD 1.6- 3.2tn), equivalent to 20-40 percent of the size of the economy, the Times said in its report on Wednesday.
The IMF rating agencies and investment banks have also raised concerns over Chinese government debt.
"But it is rare for a figure as established in the Chinese financial industry as Zhang to issue such a stark warning", the report said.
"It is already out of control. A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain," he said.
Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999.
On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable.
Since local governments are prohibited from directly raising debt, they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicle, names to fund infrastructure projects.
Loan disbursement continued to be high in China to spur growth, with China’s central bank, the People's Bank of China, saying China’s loans touched a whopping USD 441 billion in the first quarter, up USD 47 billion.
China's new yuan-denominated lending stood at 2.76 trillion yuan (USD 441 billion) in the first quarter, up 294. 9 billion yuan (over USD 47 billion) year on year.
Analysts pointed that almost half of the recent growth in credit has taken place in China's loosely regulated and largely opaque shadow banking market.
The rapid expansion has been driven largely by corporate and local government borrowers.
Despite the heavy money supply China’s growth unexpectedly slowed to 7.7 percent in the first quarter of 2013.