China has a government debt problem -- but even Beijing doesn't know exactly what is lurking on the books of local and provincial governments.
In order to find out, the Chinese government has launched a review of all public debt, according to a one-sentence statement posted on a government website.
The audit, which will begin Aug. 1, is the third effort in as many years to "take the pulse" of China's debt problem, according to state-run news agency Xinhua.
Analysts worry that China's credit boom has saddled unworthy businesses with large loans, fueled the country's shadow banking system and put local governments on the hook for trillions. Due to lax accounting and transparency standards, it's difficult for outside analysts to estimate the size of the problem or quantify associated risks.
"It is a little unsettling that the government has to do an audit at this late date to determine the full extent of local government indebtedness," said Jim Antos, a China bank analyst at Mizuho Securities. "This suggests that the full scope of borrowing has not been revealed."
As Chinese economic growth drags, concerns are mounting over the ability of local governments to repay what they owe. If city and provincial officials are unable to meet their obligations, the central government will likely be forced to bail them out.
That means very few municipalities will default, Fitch Ratings analyst Terry Gao said. But a wave of bailouts could strain Beijing's finances.
"The central government [has] the willingness and ability to prevent [defaults] from happening," Gao said. Fitch currently estimates that total local government debt is in the 15 to 18 trillion yuan ($2.5 to 3 trillion) range.
China's national audit office plans to suspend all other projects in order to conduct this "urgent" investigation, according to People's Daily, the official newspaper of the Communist Party.
It's worth noting that the credit worthiness of local governments can range widely. With 34 governing bodies at the provincial level, 333 at the prefecture level and more than 2,800 at the county level, local finances are all over the map.
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