Overview of the Audit of China’s Government-related Debt in 2013 National Audit Office of the People’s Republic of China 23 October, 2014 Seoul, Republic.
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Slide 1
Overview of the Audit of Chinas Government-related Debt in 2013
National Audit Office of the Peoples Republic of China 23 October,
2014 Seoul, Republic of Korea
Slide 2
CNAO Contents I. Introduction II. Implementation of the
Government-related Debt Audit III. Achievements of the
Government-related Debt Audit IV. Conclusion
Slide 3
CNAO I. Introduction Government debt is a common phenomenon in
modern market economies Moderate government borrowing has a
positive role in speeding up infrastructure construction, smoothing
fluctuations in economic cycles, and promoting economic and social
development Excessive government debt may adversely affect the
economy, and carry potential fiscal and financial risks
Slide 4
CNAO CNAO Continuously Paying Attention to Public Debt Taking
safeguarding national economic security as one of its most
important roles, CNAO has been continuously strengthening its
efforts in disclosing the potential risks in economic operation, so
as to perform the role of guardian in economic development Since
2010, CNAO has organized several audits of public debt, actively
promoting the management of government-related debt In 2010, audit
of the debt in 70 local governments In 2011, audit of the local
government-related debt nationwide In 2012, audit of debt in 36
local governments In 2013, comprehensive audit of the
government-related debt nationwide.
Slide 5
CNAO II. Implementation of the Government-related Debt Audit 1.
Audit objectives detailing amount reflecting situation disclosing
problems making recommendations promoting reforms
Slide 6
CNAO 2. Rational classification of local government-related
debt According to Chinas Budget Law (before amended in 2014) and
Guaranty Law, local governments are not allowed to make a deficit
budget or incur a direct debt, nor could they act as a surety. In
order to cater to the rapid economic and social development and
make up for insufficient revenues, local governments usually raise
money through the local government financing vehicles (LGFVs) to
circumvent the legal restriction.
Slide 7
CNAO 2. Rational classification of local government-related
debt Type I: debts with a direct government obligation to repay,
categorized as government debt Type II: debts guaranteed by
governments. If the debtor defaults, governments, as the
guarantors, should bear the joint liability Type III: debt that
governments may provide bailout responsibilities. If the debt
default occurs, governments might need to offer bailout assistance.
Normally, governments bear no responsibility to repay the second
and third types of debts as they should be repaid with the revenues
of the debtors. The second and third types of debts should be
classified as government contingent debt.
Slide 8
CNAO 2. Rational classification of local government-related
debt Based on the principles of prudence and risk disclosure, the
scope of government-related debt audited by CNAO includes both
government debt and government contingent debt The contingent debt
is a potential obligation, whose incurrence in uncertain. In the
balance sheet of a company, contingent debt could only be disclosed
in the notes of the financial statement instead of being counted
into the total debt amount We also noticed that in international
practices, the definition of the sovereign debt announced by some
countries is actually equivalent to our definition of the debt that
the governments are obligated to repay, in which government
contingent debt is not included Therefore, the figures of three
types of debts should not be simply added together in the analysis
of Chinas government debt issue
Slide 9
CNAO The central government, 31 provinces/autonomous
regions/municipalities directly under the central government, 5
municipalities specifically designated in the state plan, 391
cities, 2,778 counties and 33,091 townships. More than 62,000
government departments and institutions, 7,170 LGFVs, 85,000 other
entities 730,000 projects 2.45 million debts 3. Audit scope
Slide 10
CNAO The staff members of government audit institutions at
various levels nationwide total 92,000, among which 54,400
participated in this audit. The audit started in August and ended
in September 2013, taking more than two months to complete. 4.
Unprecedented efforts
Slide 11
CNAO 1. The implementation of the audit followed unified
organization and leadership, adopted unified work plan, used
unified standards and caliber, held unified principles of
management, and produced unified audit reports. 2. Governments at
various levels in different regions were inspected by higher level
audit institutions or cross inspected by the audit institutions in
other regions, which guaranteed the independence of auditing. 3.
Stuck to the principle of going over the accounts, interviewing
relevant people, seeing relevant objects with own eyes and
reviewing each and every case relating to debts 4. The audit was
implemented in strict compliance with the National Auditing
Standards to ensure its quality. 5. Meticulous organization and
implementation
Slide 12
CNAO A unified national command and management information
platform was established to realize the digitalization of audit
management, real-time monitoring of audit activities and quality
control throughout the whole auditing process. A multilayer audit
application for data verification was developed, while debts
databases, data analysis systems and analysis models were
established, and the recording, consolidating and analyzing of
audit data was digitalized, which ensured the completeness,
accuracy and reliability of the data. 6. Full use of advanced
information technology
Slide 13
CNAO 1.Fully identified the scale and structure of the
government- related debt 2.Reflected the measures to improve the
management of government-related debt in recent years 3.Objectively
evaluated the burdens of the government-related debt 4.Disclosed
the major problems in government-related debt management 5.Made
constructive recommendations for preventing debt risks and
improving debt management 6.Effectively improved public debt
management III. Achievements of the Government-related Debt
Audit
Slide 14
CNAO Time Gov. Level Debt directly owned by Gov. Contingent
gov. debt Debt guaranteed by gov. Debt that might need gov. bailout
End of June, 2013 Central 9,812.948260.0722,311.084 Local
10,885.9172,665.5774,339.372 Total 20,698.8652,925.6496,650.456 1.
Fully identified the scale and structure of the government-related
debt Scale of government-related debt Unit: billion yuan
Slide 15
CNAO Flow of debt capitalsDebt directly owned by Gov.Percentage
Urban construction3,793.50637.49% Land purchase and
storage1,689.26716.69% Transport facilities
construction1,394.30613.78% Affordable housing685.1716.77%
Education, science, culture and public health 487.8774.82%
Development of agriculture, forestry and water conservancy
408.5974.04% eco-development and environmental protection
321.8893.18% industry and energy122.7071.21% Others1,215.55712.01%
Total10,118.877100.00% Flow of debt capitals 1. Fully identified
the scale and structure of the government-related debt Unit:
billion yuan
Slide 16
CNAO 1. The management system of government-related debt was
improved. 2. The measures to prevent debt risks were strengthened.
3. Solvency of LGFVs was improved. 2. reflected the measures to
improve the management of government-related debt in recent
years
Slide 17
CNAO General opinion: In the perspective of Chinas economic
development level, current status of government-related debts and
inter-relationship of assets and liabilities, the risks of Chinas
government- related debts at present are controllable. 3.
Objectively evaluated the burdens of the government-related
debt
Slide 18
CNAO A. Debt ratio is lower than the reference international
standard of 60% At the end of 2012, the ratio between nationwide
government-related debt balance and the GDP of that year was
36.74%. Taking into account the contingent liabilities multiplied
by the highest percentage of actual payment for contingent
liabilities with fiscal funds, the nationwide government-related
debt ratio totaled 39.43%, still lower than the reference standard
of 60% debt ratio as commonly used in the international community.
i. The indicators of debt risks are within the reference scope of
controllable standards commonly used in the international
community.
Slide 19
CNAO B. Ratio between government external debts and GDP is low
At the end of 2012, the nationwide governmental foreign debts
balance witnessed 473.358 billion yuan, accounting for 0.91% of the
GDP, far below the 20% reference control standard commonly used in
the international community. i. The indicators of debt risks are
within the reference scope of controllable standards commonly used
in the international community.
Slide 20
CNAO C. Overdue ratio remains a low level With the removal of
overdue debts occurred by accounts payable, the overdue ratio of
direct government debt -- 1.01%. Overdue ratio of the debt
guaranteed by governments -- 1.61% Overdue ratio of the debt that
might need government bailout assistance -- 1.97% i. The indicators
of debt risks are within the reference scope of controllable
standards commonly used in the international community.
Slide 21
CNAO The capitals of government-related debt were mostly
invested in urban construction, peoples livelihood and
infrastructure, and forms into a large number of high- quality
assets with operating revenues to come. The debts were used for
construction and development instead of consumption. Such
investment would promote the economic development and improve
peoples livelihood, and stimulate further development and continue
to improve solvency. ii. most of the local government-related debts
have corresponding assets or revenues.
Slide 22
CNAO Chinas economy has been maintaining a robust growth for a
long time. The 3rd Plenary Session of the 18th National Congress of
the CPC rolled out a great blueprint for comprehensively deepening
the reform, and the dividends of reform will be shared by more
people. In the long run, the robust economic development will give
important assurance to the security of local government-related
debt. iii. Chinas robust economic development also gives important
assurance to the security of local government-related debt.
Slide 23
CNAO i. Local government debt that should be repaid by the
governments increased fast. ii. Some localities and trades had
rather heavy debt burdens. The debt ratio in some regions had
exceeded 100%, making the pressure on debt repayment quite heavy.
iii. Local government-related debts relied highly on revenues from
land transfer. iv. Some localities and entities raised funds and
used governmental debt capital in violation of regulations. 4.
Disclosed the major problems in government-related debt
management
Slide 24
CNAO i. To establish standardized governmental borrowing
mechanism for raising funds and improve government-related debt
management systems. ii. To establish sound accountability systems
for local government-related debt management to strengthen
accountability. iii. To further transform government functions,
steadily push forward institutional and mechanism reforms related
to investment, fund-raising, financing and taxation. iv. To
establish sound mechanisms for debt risks early warning and
emergency response, properly handle the stock of debts and prevent
debt risks. 5. Made constructive recommendations for preventing
debt risks and improving debt management
Slide 25
CNAO Governments at all levels highly recognized the audit
results -- The Central Economic Work Conference in 2013 listed the
prevention and control of debt risks as one of the six major tasks
of economic work in 2014. -- Relevant departments issued a new rule
to include the government debt level as one of the most important
indicators of officials performance evaluation. -- A provision
allowing local governments to incur debt was added to the Budget
Law amended in 2014, and a mechanism regulating local government
financing was established. -- On September 21, 2014, the State
Council issued the Opinions on the Strengthening of Local
Government Debt. -- On October 8, 2014, the State Council issued
the Decision to Deepen the Reform of Budget Management System,
demanding improvement of the annual budget control system,
establishment of a comprehensive system for accrual government
financial statement, standard management of local government debt
and prevention of risks in public finance. 6. Effectively improved
public debt management
Slide 26
CNAO A follow-up audit carried out by CNAO in the first half of
2014 shows From the end of June 2013 to the end of March 2014, the
growth of government-related debt in 18 spot-checked regions had
slowed down by 7 percentage points compared with the growth rate in
the first six months of 2013. 6. Effectively improved public debt
management
Slide 27
CNAO Chinas audit of government-related debt produced a
significant and far-reaching impact on public debt management in
China, which has given full play to the role of SAIs in improving
national governance. CNAO will continue to make efforts in
establishing a standard, transparent and effective system of public
debt management. We will make full use of the platform of INTOSAI
Working Group on Public Debt, learn from the advanced experience of
different countries in public debt auditing, explore new
methodologies and new territories, and strive to make further
achievements in public debt auditing. IV. Conclusion