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 of Korea
Contents
 I. Introduction
 II. Implementation of the Government-related
Debt Audit
 III. Achievements of the Government-related
Debt Audit
 IV. Conclusion
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
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.
CNAO
II. Implementation of the
Government-related Debt Audit
1. Audit objectives
—— detailing amount
—— reflecting situation
—— disclosing problems
—— making recommendations
—— promoting reforms
CNAO
2. Rational classification of local
government-related debt
According to China’s 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.
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”.
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 China’s government
debt issue
CNAO
3. Audit scope
 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
CNAO
4. Unprecedented efforts
 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.
Auditors participated
Auditors not participated
CNAO
5. Meticulous organization and
implementation
 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.
CNAO
6. Full use of advanced
information technology
 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.
CNAO
III. Achievements of the
Government-related Debt Audit
1.
Fully identified the scale and structure of the governmentrelated 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
CNAO
1. Fully identified the scale and structure of
the government-related debt
Scale of government-related debt
Contingent gov. debt
Time
Gov.
Level
Debt guaranteed
by gov.
Debt that
might need
gov. bailout
9,812.948
260.072
2,311.084
Local
10,885.917
2,665.577
4,339.372
Total
20,698.865
2,925.649
6,650.456
Central
End of
June,
2013
Debt directly
owned by Gov.
Unit: billion yuan
CNAO
1. Fully identified the scale and structure of
the government-related debt
Flow of debt capitals
Flow of debt capitals
Unit: billion yuan
Debt directly owned by Gov.
Percentage
Urban construction
3,793.506
37.49%
Land purchase and storage
1,689.267
16.69%
Transport facilities construction
1,394.306
13.78%
Affordable housing
685.171
6.77%
Education, science, culture and
public health
487.877
4.82%
Development of agriculture,
forestry and water conservancy
408.597
4.04%
eco-development and
environmental protection
321.889
3.18%
industry and energy
122.707
1.21%
1,215.557
12.01%
10,118.877
100.00%
Others
Total
CNAO
2. reflected the measures to improve the
management of government-related debt in
recent years
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.
CNAO
3. Objectively evaluated the burdens of the
government-related debt
General opinion: In the perspective of
China’s economic development level,
current status of government-related debts
and inter-relationship of assets and
liabilities, the risks of China’s governmentrelated debts at present are controllable.
CNAO
i. The indicators of debt risks are within the
reference scope of controllable standards
commonly used in the international community.
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.
CNAO
i. The indicators of debt risks are within the
reference scope of controllable standards
commonly used in the international community.
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.
CNAO
i. The indicators of debt risks are within the
reference scope of controllable standards
commonly used in the international community.
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%
CNAO
ii. most of the local government-related debts
have corresponding assets or revenues.
 The capitals of government-related debt were mostly
invested in urban construction, people’s livelihood and
infrastructure, and forms into a large number of highquality 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 people’s livelihood, and
stimulate further development and continue to improve
solvency.
CNAO
iii. China’s robust economic development also
gives important assurance to the security of local
government-related debt.
 China’s 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.
CNAO
4. Disclosed the major problems in
government-related debt management
 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.
CNAO
5. Made constructive recommendations for
preventing debt risks and improving debt
management
 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.
CNAO
6. Effectively improved public debt
management
 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.
CNAO
6. Effectively improved public debt
management
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.
CNAO
IV. Conclusion
 China’s 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.
CNAO
Thank you!
CNAO