There are growing concerns about the amount of bad loans being held by local governments.Official figures show they held debt of 10.7tn yuan ($1.7tn; £1.1tn) in 2010.
“The State Council is studying proposals to enhance local government debt management and to address fiscal and financial risks,” the audit office said in the report.
‘Again and again’
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A lot of the local debt will be absorbed by the central government”
Michael Pettis Peking University
Local governments have been borrowing money from Chinese banks to fund projects aimed at maintaining economic growth.
According to the China Banking Regulatory Commission, local governments took up 80% of total bank lending in China at the end of 2010.
However, analysts said that although the lending had helped to spur investment and boost growth, it was now weighing on local governments.
“Whenever you look at lending that spurs growth miracles, it starts off with an increasing ability to pay the debt,” Professor Michael Pettis of Peking University told the BBC.
“But in every case that ability fades. That is the process that is happening in China,” he explained. “We are going to see stories like this again and again.”
In October last year, China allowed four local governments to sell bonds for the first time in 17 year. It was hoped the sale would help them pay their loans.
However, the central government put a limit on the amount of bonds the local governments could issue despite the fact that there was a lot of interest among investors.
According to the Xinhua news agency, Shanghai’s bond sale received bids for three times the amount of bonds on offer.
As a result, many of the local governments still have sizeable debts and while the central government may let them raise money, it may also have to take further measures to solve the problem, analysts said.
“A lot of the local debt will be absorbed by the central government,” said Mr Pettis of Peking University.
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