How much have China's local governments borrowed? The answer has always been shrouded in mystery.
The last official update was released by the National Audit Office in mid 2011. It put the nationwide figure at 10.7 trillion yuan ($1.75 trillion) by the end of 2010.
Last week, the audit office issued a new report, a much less comprehensive one covering only 36 local governments at different levels. This said debt in the selected areas had grown 13 percent in the last three years. Extrapolating the audit office's report's 13 percent rise in local government debt across the entire country, Moody's Investors Service estimates the direct and guaranteed debt of local governments could have been 12.1 trillion yuan at the end of 2012.
"However, such an estimate assumes the remaining jurisdictions not included in the NAO report had a similar rate of debt accumulation, which we do not know for sure was the case," said Debra Roane, vice-president and senior credit officer of the sovereign risk group with Moody's.
Selected local governments in the new report comprise 15 provinces and the 15 provincial capital cities, as well as three municipalities and three districts.
Some Chinese officials have also made their estimates: 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.
"I personally agree with former minister Xiang's estimate of 20 trillion yuan stock in local debts," said Zhao Quanhou, head of financial research with the Fiscal Science Research Center at the Ministry of Finance.
Zhao said the figure might vary because of different statistics criteria. Xiang's estimate has taken into consideration all the off-balance sheet financings of local authorities.
China's local governments are not allowed to borrow directly so a series of government-guaranteed investment companies — known as local government financing vehicles — have been established to handle the issue.
However, Zhao said because the central government tightened regulation of the financing vehicles last year, other State-owned enterprises under the supervision of local State-owned assets watchdogs were also asked to raise money on behalf of local authorities. However, such borrowings would not appear on local government balance sheets.
Additionally, local authorities have also been relying on "irregular financing channels" to raise money, such as wealth management products issued by local commercial banks, as well as delaying payments on construction projects, the audit office's report said.
"This development also poses a risk because a portion of these transactions is not recorded as debt obligation on balance sheets and, therefore, adds a further layer of complexity in determining local government debt levels," Roane said.
"Some of these products bear interest rates as high as 17.5 percent. The People's Bank of China has a 5.6 percent benchmark loan rate. This adds to the debt burden and creates budget pressure for some entities."
As for the surveyed local governments, bank loans remain the largest source of financing for local governments, accounting for 78 percent of the total balance by the end of 2012, but their share has decreased by 5.6 percentage points since 2010.
In comparison, debt issuance and other borrowings have rocketed by 62 percent and 125 percent respectively during the same period. "Such figures are also representative of other local governments across the country," Zhao said.
He said bank loans and bond issuance together account for approximately 90 percent of the debt on local government balance sheets, while the other 10 percent consists of private equity funds and default on construction payments.
According to a calculation by The Economic Observer, local governments will face two trillion yuan in debts due this year. That accounts for nearly 20 percent of their fiscal revenue and more than half of the fees from land sales.
"Such a large amount of payments would definitely hinder local governments' investment ability and, therefore, add pressure on local economic growth," said Wang Yongjun, director of the Institute for Finance and Economics Research at Central University of Finance and Economics.
To deal with the problem, experts are calling for an increase in local government revenues by up to 2 trillion yuan a year by means of a series of reforms in taxation and income division between local and central government.
"The challenge of the local government debt issue will definitely push forward further reform in the fiscal system but such reform is not restricted to simply seeking more revenue for local governments," Zhao said.
He added that 85 percent of the fiscal revenue in 2012 ended up in the pockets of local authorities so there will not be much room for improvement.
"The main problem is the inconsistency of liabilities in the investment, approval and construction of local government projects," Zhao said,
He also suggested the financing source of a public project must be approved before it gets to the construction stage.