Local governments have the responsibility of taking care of their residents and inhabitants. They borrow funds and loans to enable them to run their systems and structures effectively and with efficiency. However, some of the funds may be too huge for a local government to handle and may end up risking the economy of the state or government. An article in the Los Angeles Times by David Pierson in June 2009 raises the suspicion of a local government that has incurred huge debts that risk the operations and economy of the local government. According to the article, the local governments of China have borrowed loans that amount to close to $1.65 trillion . They have done so with minimal oversight or regulations that will ensure that the loans are used for the intended purposes. These loans are acquired by the local governments to provide the social immediate needs of the residents of these specific geographical areas.
The lack of a regulatory oversight committee makes it easy for those who are vested with the responsibility of monitoring the movement of funds in the local governments gives them the loophole to mismanage the funds and use them for their personal interests. Money given to local governments is meant to fund education, local roads and equip local hospitals and if the money is mismanaged many things would go very wrong. The author asserts that the funds that the local governments have as loans were channeled to the stock market and the real estate sector which is already overheated. This revelation has come to light after a review by the China’s audit office was conducted about the finances. In addition, approximately half of the money issued as loan was spent during the global financial crisis. This was in an effort to fend off the effects as the banks in Beijing, China issued new record of credit. The credit was meant to stimulate the economy. The reason this debt is threatening the economy of China is that it is estimated to be 27% of the gross domestic product of the country’s economy .
According to the article, the local governments lend out the amount to companies that did not present their financial statements including balance sheets for scrutiny . These huge implications on the spending of local governments pose a risk on the economy that is fighting another menace of rising inflation. The local governments are looking for all ways and means to try and pay up the loans. There are various ways which local governments may use to pay up loans they have acquired from other parties. Additional borrowing at lower interest rates, collection in form of taxes and fees and charging of rates and sale of land are sources of revenue for the local governments. In Beijing, the local governments are selling land to investors and developers who in turn use the land for real investment.
Some of the projects that local governments indulge on may not be profitable for a long span of time but are very beneficial to the society and community in the proximity of the project. These include roads, infrastructure and even hospitals. According to the article, the rail and highways that many local governments invested in China will not e profitable in a long time but are very beneficial to the community. This translates to slow payment of the loans and thus an increase in interest. The author argues that local governments need to clearly show their ability to pay loans before any can be advanced to them . The failure of this makes many local governments overstate their collateral and this lies about their payment ability.
Pierson, D. (2011). Local Government debt in China raises risk to economy. Los Angeles Times , 1-2.