Overview of the Audit of China’s Government-related Debt in 2013

1. 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

2. I. Introduction II. Implementation of the Government-related Debt Audit III. Achievements of the Government-related Debt Audit IV. Conclusion Contents

3. 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 I. Introduction

4. 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 Continuously Paying Attention to Public Debt

5. 1. Audit objectives —— detailing amount —— reflecting situation —— disclosing problems —— making recommendations —— promoting reforms II. Implementation of the Government-related Debt Audit

6. 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. 2. Rational classification of local government-related debt

7. 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”. 2. Rational classification of local government-related debt

8. 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 2. Rational classification of local government-related debt

9. 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

10. 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.

11. 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

12. 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

13. Fully identified the scale and structure of the government-related debt Reflected the measures to improve the management of government-related debt in recent years Objectively evaluated the burdens of the government-related debt Disclosed the major problems in government-related debt management Made constructive recommendations for preventing debt risks and improving debt management Effectively improved public debt management III. Achievements of the Government-related Debt Audit

14. 1. Fully identified the scale and structure of the government-related debt Scale of government-related debt Unit: billion yuan

15. 1. Fully identified the scale and structure of the government-related debt Flow of debt capitals Unit: billion yuan

16. 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

17. 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 government-related debts at present are controllable. 3. Objectively evaluated the burdens of the government-related debt

18. 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.

19. 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.

20. 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.

21. The capitals of government-related debt were mostly invested in urban construction, people’s 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 people’s livelihood, and stimulate further development and continue to improve solvency. ii. most of the local government-related debts have corresponding assets or revenues.

22. 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. iii. China’s robust economic development also gives important assurance to the security of local government-related debt.

23. 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

24. 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

25. 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

26. 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

27. 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. IV. Conclusion

28. Thank you!