Economists encourage greater openness and market liberalization

Economists in China have called for a more liberalized market and greater transparency in soaring local government debts.

The latter must be achieved before decision makers can have a clear idea of what to do with the debts, said economists at a conference on China's financial policies in Shanghai on Monday.

Xu Xiaonian, professor of finance at the China-Europe International Business School (CEIBS), said it is unclear how much money local governments have borrowed from various parties since the central government introduced a 4-trillion-yuan ($644 billion) stimulus package to boost the economy and domestic demand in 2008.

"In localities with relatively good financial conditions such as those coastal cities in the eastern and southern parts of China, local government debts are about two times that of annual fiscal revenue ... and some overseas institutions estimate that debts at various levels of government in China may be 100 percent of China's GDP," said Xu.

Xu said to clear up non-performing debts, it is essential to have a clear picture of local government balance sheets.

Concerns over government debt in the world's second-largest economy have intensified since decision-makers tightened financing in the real estate sector. This affects local governments' land sales, a major source of their fiscal income.

The development of the local real estate industry and local governments' debts are intertwined, and if housing prices drop drastically, lenders may have to face heavy bad debts, said Xu.

China has seen mounting leverage in its economy over the past five years. On top of this, a considerable part of new lending in recent years was conducted via shadow banking, which was a major resource of financing for local governments, said Qian Xuening, deputy secretary-general of the Lujiazui Institute of the Chinese Academy of Social Sciences.

Xiang Huaicheng, minister of finance from 1998 to 2003, said at the Boao Forum for Asia Annual Conference 2013 in Hainan province on Saturday that he estimated the debts accumulated by local governments to stand at somewhere around 20 trillion yuan, nearly double the official estimates.

Debt ratio is not considerable and domestic debt accounted for 95 to 98 percent of total debt, which helps to guarantee the overall health of the leverage level, Xiang said.

Xu of CEIBS said he does not think a debt crisis such as the one the eurozone is experiencing will occur in China because governments at various levels have large amounts of assets that they may sell to pay off debts.

However, it is not easy to sell State-owned assets as ownership may result in controversies, and some assets, such as those of railways, are unlikely to be sold, he said.

Economists said financial institutions, especially banks, need to watch out for non-performing debts as result of local governments' unsuccessful projects.

"Prevention of the risks emerging in local governments' financial platforms is essential for financial institutions," said Wu Xiaoling, a former deputy central bank governor and director of the CEIBS Lujiazui Institute of International Finance.

Pan Yingli, professor of finance at Shanghai Jiao Tong University, suggests the establishment of a mechanism to enable local governments to issue bonds for trading in Hong Kong.

"Under the mechanism and Hong Kong law, international capitalists and investors can restrain local governments' financial behavior; local governments should push forward transforming their financial decision-making to achieve more transparency and a more scientific and democratic decision-making process," she said.

Xiao Geng, research director and senior researcher at the Jinglun Institute for International Economics, said there will be no solution for local government debts without infrastructure that defines the ownership and settlement of assets and debts before local governments can issue bonds.