A local financial time bomb

• Published 20 Aug 2009

Local government finances constitute the biggest single long-term risk to China's financial system.

When it comes to China's local government finances, several long words spring to mind; labyrinthine, byzantine and leviathan are a few. Each rung in the pyramidal administrative hierarchy from over 900,000 villages, to townships, to counties, to cities and finally to 32 provincial or regional governments, has its own budget, its own enterprises, its own pet projects and its own profit and loss accounts. Add into this complex system the fact that the performance of officials at each level is judged by their superiors mainly on the economic growth that they generate, and the motive for creative accounting becomes clear. It is well known that many local administrations keep several sets of books. This is what is hinted at by the old phrase, "Numbers make cadres, and cadres make up the numbers".