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China’s local governments may have more than 20 trillion yuan ($3.2 trillion) of debt, former Finance Minister Xiang Huaicheng said, almost double the figure given in a 2011 report by the National Audit Office.

The combined debt of China’s central governments and the nation’s provinces and cities may currently be more than 30 trillion yuan, Xiang, who served as finance minister from 1998 to 2003, said at the Boao Forum for Asia. Local governments had 10.7 trillion yuan of debt at the end of 2010, the auditor said in its report.

“It seems the central government’s debt level is quite transparent, while local government debt isn’t, and therefore it’s not easy to get a clear picture,” Xiang said April 6. He added that since he retired, he’s no longer “within the system” and that his comments on government debt are based on his own personal estimates.

China has sought to curtail borrowing by local governments because of concerns that banks will be saddled with bad debts. The nation’s central bank estimated in 2011 that local governments, which are barred from directly taking bank loans or selling debt, had set up more than 10,000 financing arms to fund the construction of roads, bridges and sewage plants.

“We recognize some progress has been made by the central authorities to keep that level of indebtedness and the local public finance under better watch,” International Monetary Fund Managing Director Christine Lagarde said at the Boao Forum yesterday. “To make sure the borrowing by local authorities is actually kept under control and not diverted through various agencies or off-balance sheet structures, is critical to actually keep public finances under control.”

Strengthen Controls

Wen Jiabao said on March 5 in his final work report to the National People’s Congress as premier that China will strengthen management over the debt of provinces and municipalities. Loans to China’s local government financing vehicles, or LGFVs, currently total about 9.3 trillion yuan, an increase of 2 percent in two years, the China Securities Journal reported on March 8, citing bank regulator Shang Fulin.

The public doesn’t need to be alarmed by the level of government debt because as a ratio of China’s gross domestic product it is “not particularly high” and because the borrowings are mostly domestic, Xiang said at the forum. There’s also no sign of lending going to “very, very bad” projects or work with “very, very low efficiency,” Xiang said.

He also applauded efforts by new Finance Minister Lou Jiwei in overseeing a study on local government debt levels, saying the review shows China is taking the issue seriously.

“Right now our situation is very good,” Fred Hu, founder of the private equity firm Primavera Capital and former Greater China chairman at Goldman Sachs Group Inc., said at the Boao Forum. “But what about in the coming five years, 10 years, 20 years?” he said, adding that if the issue of local government borrowing isn’t addressed China could face a debt crisis.