Beijing (AsiaNews) - China's government launched a nationwide audit of all local government to vet their debt and financial situation. This has led to fears that the recent slowdown in the economy could affect the financial sector. If the world's second economy experiences a "hard landing", the already shaky US public finances could be in for a rough ride.
In order to limit the negative impact of the global economic crisis, and support a system based on corruption and embezzlement, China's provincial governments have piled up huge debts to maintain a high rate rate of growth. According to the last audit, provinces had debt of 10.7tn yuan (US$ 1.7 trillion) by the end of 2010.
In view of the situation and "In line with a request of the State Council, the National Audit Office (NAO) will organize auditing agencies across the country to carry out an audit of government debt," the national auditor said in a statement on its website.
NAO said that it had halted all other projects to conduct the audit, but did not give any other details or a timeline for the audit.
The investigation could show how widespread the harm to the Chinese economy is. To maintain economic growth at high levels, and preserve social stability linked to the creation of jobs, provincial governments in 2010 could use huge amounts of money (about 4 trillion yuan) approved by the central government.
A portion of this money went into infrastructure and state-owned companies, but the largest chunk ended up as loans to individuals and investments in real estate.
Driven by easy money, Chinese property developers created a speculative bubble that led to "ghost buildings" that stand empty in the suburbs and sometimes even in the downtowns of all of China's major cities.
Created by government loans, but not producing any wealth, these investments have become a financial nightmare that could undermine the foundations of the nation's social and economic system.
This has been going on for years. Overproduction and monetary distortion, excess money supply followed by a tighter purse to fight inflation as well as the forced recapitalization of Chinese banks in the past two years could cause a sudden and devastating collapse of China's economy.
However, in 2011, Larry Lang, a well-respected commentator and professor in the Department of Finance at the Chinese University in Hong Kong, had warned that China's "public finances are in the red" and that "Beijing is cheating to stay alive."