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China's local government debt may be £1 trillion more than estimated
China may have underestimated the extent of the black hole in local government finances by as much as £1 trillion, the country's former finance minister has said.

Xiang Huaicheng said that the extent of debt among the 10,000 financing arms operating on behalf of China's local governments was difficult to calculate.

“It seems the central government’s debt level is quite transparent, while local government debt isn’t, and therefore it’s not easy to get a clear picture,” he told delegates at the Boao Forum this weekend.

Mr Xiang said that based on his calculations, local governments in China may have amassed more than 20 trillion yuan (£2.1 trillion) of debt, almost double the figure given in a 2011 report by the National Audit Office.

However, Mr Xiang, who served as China’s finance minister for five years in the aftermath of the 1998 Asian financial crisis, told the audience that the country's debt pile posed no immediate threat because it still represented a small figure relative to its rapidly rising economic output.

Debt as a percentage of gross domestic product (GDP) stood at just 37.8pc in 2011 and 40pc last year, said Mr Xiang.

"Some problems should not be ignored, although the debt issue is not so serious," he said.

Central government efforts to protect Chinese GDP growth levels meant that local governments were encouraged to bring forward a vast range of infrastructure and other public spending projects in the months after the collapse of Lehman Brothers in 2008.

Christine Lagarde, managing director of the International Monetary Fund, urged China to keep a close eye on local government spending.

“We recognise some progress has been made by the central authorities to keep that level of indebtedness and the local public finance under better watch,” she said at the forum on Sunday.

“To make sure the borrowing by local authorities is actually kept under control and not diverted through various agencies or off-balance sheet structures, is critical to actually keep public finances under control.”

Wen Jiabao, China's former Premier, said last month that the government would work to strengthen its management over the debt of provinces and municipalities.

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