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Overview of the Audit of China

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Title: Overview of the Audit of China


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

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

3
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

4
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.

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

6
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.

7
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.

8
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

9
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

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
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.

12
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.

13
III. Achievements of the Government-related Debt
Audit
  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

14
1. Fully identified the scale and structure of
the government-related debt
Scale of government-related debt
Time Gov. Level Debt directly owned by Gov. Contingent gov. debt Contingent gov. debt
Time Gov. Level Debt directly owned by Gov. Debt guaranteed by gov. Debt that might need gov. bailout
End of June, 2013 Central 9,812.948 260.072 2,311.084
End of June, 2013 Local 10,885.917 2,665.577 4,339.372
End of June, 2013 Total 20,698.865 2,925.649 6,650.456
Unit billion yuan
15
1. Fully identified the scale and structure of
the government-related debt
Flow of debt capitals
Unit billion yuan
Flow of debt capitals 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
Others 1,215.557 12.01
Total 10,118.877 100.00
16
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.

17
3. Objectively evaluated the burdens of the
government-related debt
  • 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.

18
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.

19
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.

20
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

21
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, 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.

22
iii. Chinas robust economic development also
gives important assurance to the security of
local government-related debt.
  • 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.

23
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.

24
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.

25
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.

26
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.

27
IV. Conclusion
  • 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.

28
  • Thank you!
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