Fitch Ratings' estimate of China's local government debt is vastly more pessimistic than other analyses, but recent statements from government officials suggest that even Fitch may be too optimistic.
The agency, which downgraded the country's sovereign credit rating this week, puts China's overall sovereign debt at 74 percent of GDP by the end of 2012, of which 49 percent is central government and 25 percent is local.
Dealing with the systemic risk posed by local government debt is seen as one of the key priorities for the administration of China's new president, Xi Jinping.
Fears about local debt first arose in the aftermath of Beijing's 4 trillion yuan stimulus package unleashed at the height of the global crisis in 2008.
Recent data indicates that, after stabilizing in 2011, local debt surged again last year as policymakers launched a new wave of infrastructure spending to stabilize the world's No.2 economy amid its slowest growth in 13 years.
Fitch's debt-to-GDP tally is far greater than Standard Chartered's estimate of 50 percent for combined central and local debt. Beijing-based macroeconomic consultancy GaveKal-Dragonomics puts the combined figure at 49 percent, while Barclays says 62 percent.
In fact, even Fitch's relatively pessimistic estimate may be too rosy.
The head of China's National Audit Office (NAO), which published a detailed survey of local debt in 2011, recently estimated current local debt outstanding at 15 to 18 trillion yuan -- equal to 29 to 35 percent of GDP -- by the end of 2012.
That's well ahead of Fitch's estimate of 12.85 trillion yuan and an increase from the NAO's previous estimate of 10.7 trillion yuan in local debt outstanding by end-2010.
A former finance minister, Xiang Huaicheng, said at a forum last week that local debt may total as much 20 trillion yuan.
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Fitch's calculation of China's total non-financial debt is broadly in line with other analysts at 198 percent of GDP. The disagreement arises from the lack of clarity over how large swathes of Chinese debt should be classified.
China's budget law forbids local governments from taking on debt directly, but localities have borrowed trillions through special-purpose vehicles known as local-government financing vehicles (LGFV).
But it's no simple matter to determine whether a particular entity is an LGFV whose borrowing should count as local government debt, or a state-owned enterprise operating as a commercial business, in which case its liabilities should count as corporate debt.
"The classification of lending between corporate and (local government) sectors has been opaque. Lack of transparency over the indebtedness of LGs is a shortcoming for China relative to peers," Fitch said in its statement accompanying the downgrade.
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Classification has become even trickier since 2011, when China's banking regulator created a blacklist of LGFVs to which banks were discouraged from lending. In response, many LGFVs took steps to disguise their role as instruments of fiscal policy.
In a recent research note, Stephen Green, head of Greater China research for Standard Chartered in Hong Kong, described a meeting with a manager at an LGFV in a second-tier city that was building a metro line.
"We asked how they got a bank loan, given that they were primarily engaged in a public infrastructure project. To this, the indignant finance manager replied that they were not an LGIV," Green wrote, using an alternate acronym for LGFV.
"The consequence is that some of the 'corporate' leverage we estimate above should probably be moved to the government's balance sheet. But we have no idea how much," Green wrote.
In reality, the scale of local government debt may not simply be unknown, but also unknowable, at least at the moment.
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Official statements over the last year suggest that even the government itself hasn't yet decided which debt it will treat as sovereign obligations in the event that an LGFV lacks the ability to service its own debt.
Indeed, regulators are still engaged in the process of classifying local debt based on the types of projects that such debt was used to finance.
That means some banks and bond investors who believe that the LGFV debt they own carries an implicit government guarantee could eventually be proven wrong.