Mayor of indebted Chinese city says still need to aid failing government firms

BEIJING (Reuters) – The mayor of one of China’s most high-profile debt-strapped cities said it will have to lend assistance to failing local government firms, even as he tries to bring the city’s finances under control.

Baotou, a city of almost 3 million in China’s Inner Mongolia Autonomous Region, shot to prominence as an example of a local government that has overextended in pursuit of rapid economic growth. In August, it canceled a 32 billion yuan ($5 billion) subway project, saying its finances could not support the plan and later admitted it had over-reported government revenue.

“Based on our current fiscal revenues, the burden was too heavy,” Mayor Zhao Jiangtao said in an interview with Reuters on Friday on the sidelines of China’s parliament session. He added that Baotou’s debt was already too high at more than 100 percent of GDP.

While Beijing has stressed local authorities cannot serve as a backstop for borrowing by government firms, Zhao said it would be impossible for the city government to not step in to help local government firms facing default.

The city government should take over the cost of providing social services such as running schools, he added.

“This would be a huge help to (local government firms),” he said.

Zhao added he was in the process of verifying the level of “hidden” debt in Baotou, including debt of local government financing vehicles.

Corporate and financial institutions’ heavy reliance on government intervention – a legacy of China’s planned economy system – will take years to overcome, he said.

Zhao added, however, that despite a more conservative fiscal policy, Baotou’s efforts to upgrade its industrial base and bring in more private investors made him optimistic the city could meet its goal of 7 percent economic growth this year.

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