No.35 of 2011 (General Serial No. 104) Audit Findings on China s Local Government s Audit Findings on China s Local Governmental s In compliance with the arrangement of the Communist Party of China (CPC) conference on economic work and the 4th session of the 11th National People s Congress (NPC), the State Council decided that the National Audit Office of China (CNAO) should organize audit institutions at all levels throughout China for an overall auditing on the debt of China s local governments. As required in the notice for perfecting the auditing work on the local governmental debts by the general office of the State Council (telegraph [2011] No.6 by the State Council general office), the party committees and governments at various levels gave all-out support, and departments of finance, development and reform, the people s banks and the banking supervising organs at various levels worked in close coordination. From March to May 2011, by organizing 41300 auditors throughout China and adhering to the principle of going over the accounts, interviewing relevant people, seeing relevant objects with their own eyes and reviewing each and every case relating to debts, the CNAO undertook an overall auditing on the debt of the 3 levels of local governments ( thereinafter referred to as the provincial, municipal, and county levels) of 31 provinces (autonomous regions, municipalities directly under the central government) and 5 municipalities specifically designated in the state plan, and the affiliated cities (di, zhou, mong, qu) and counties ( shi, qu, qi). Owing to the earthquake, the Yingjiang county of Yunnan province was not audited yet. The scope of audit was the following: 25590 government departments and institutions, 6576 financing platform companies, 42603 government-affiliated institutions receiving budgetary subsidies, 2420 public undertakings, 9038 other units plus 373805 projects, totaling 1.873683 million items of debts. The auditing focused on debts which the government bears the responsibility for repayment. [1] Audits were also undertaken on probable debts where the debtor was unable to pay back when the government will have to bear the responsibility of guarantee and other relevant debts when the government may take certain responsibility of rescue. With a view to ensuring the truthfulness, accuracy and integrity of the audit data and circumstances, the auditors verified each debt and obtained evidence. The audit findings have included the views of the provincial, municipal and county governments. The audit findings are announced as follows: 1. Overall situation of the local governments debt 1) The size of debt As of the end of 2010, the balances of the local governmental debt stood at 10.717491 trillion yuan. Of this, the debt the government bears the responsibility of repayment for was 6.710951 trillion yuan, or 62.62. The probable debt the government bears responsibility of guarantee for was 2.336974 trillion yuan, or 21.80. Other relevant debt the government may have to take the responsibility of rescue for was 1.669566 trillion yuan, or 15.58 (see Diagram 1). 1
Diagram 1: The size of debts of the local governments as of the end of 2010 Other relevant debts was 1.669566 trillion yuan, or 15.58 The debt the government bears the responsibility of repayment for was 6.710951 trillion yuan, or 62.62 The debt the government bears the responsibility of guarantee for was 2.336974 trillion yuan, or 21.80 Of the local governmental debt balances as of the end of 2010, 5.481611 trillion yuan, or 51.15 was raised in 2008 and the year before, and was used for the continued construction of the projects that had begun before 2008. Of this, 3.198904 trillion yuan, or 29.85 was raised in 2008 and the year before. 2.282707 trillion yuan, or 21.30 was used for the continued construction which had begun in 2008 and the years before and the repayment of the principal and interest of debts in those years. 2) The evolving situation of debt-raising The debts for which the local governments bear responsibilities of repayment began in 1979 when 8 counties and districts raised debts, the governments bear the responsibilities of repayment. Since then, various localities followed suit. 1981 to 1985 were the years when the provincial governments (including municipalities specifically designated in the state plan) mostly raised debts with responsibilities of repayment or guarantee. During this period, 28 provincial governments began raising debts. And 1986 to 1996 featured the years when the municipal and county governments mostly began borrowings. During this period, 293 municipal governments and 2054 county governments began borrowings. As of the end of 1996, all provincial governments throughout China, 353 of the 392 municipal governments (or 90.05) and 2405 of the 2779 county governments (or 86.5) have had borrowings. By the end of 2010, only 54 county governments did not raise governmental debts. Chart 1 shows the years when various localities began raising debts. 2
Chart 1 Years when local governments began their borrowings Provincial Level Municipal Level County Level Amount Amount Amount years of Govern ments began to raise Accumu lative amount percent age of Govern ments began to raise Accumu lative amount percent age of Govern ments began to raise Accumu lative amount nt Perce ntage debts debts debts 1979 1980 0 0-4 4 1.02 51 51 1.84 1981 1985 28 28 77.78 56 60 15.31 300 351 12.63 1986 1990 5 33 91.67 121 181 46.17 833 1184 42.61 1991 1996 3 36 100 172 353 90.05 1221 2405 86.54 3) Annual changes of debt size Since 1997, the size of China s governmental debts has unfolded an annual growth with the economic and social development. The debt balance in 1998 and 2009 increased by 48.20 and 61.92 respectively compared with the previous years. That of 2010 increased by 18.86 compared with the year before with the rate of increase dropping by 43.06 (see Diagram 2 for details). 3
(Note: In Diagram 2, the 2002 growth rate refers to that from 1998 to 2002, and the 2007 growth rate referring to that from 2002 to 2007.) 4) The composition of debt balances (1)In terms of the government level, as of the end of 2010, the balances of provincial, municipal and county governmental debts, stood at 3.211194 trillion yuan, 4.663206 trillion yuan and 2.843091 trillion yuan, or 29.96, 43.51 and 26.53 respectively (see Diagram 2 and Chart 3 for details). Diagram 2 Layout of balances of China s local governments debts by the end of 2010 Unit: one hundred million yuan Type of debts total Provincial level Municipal level County level amount Ratio amount Ratio amount Ratio amount Ratio s for which the government bears the responsibility of repayment 67109.51 100.00 12699.24 18.92 32460.00 48.37 21950.27 32.71 s for which the government has the responsibility of guarantee Other relevant debts 23369.74 100.00 11977.11 51.25 7667.97 32.81 3724.66 15.94 16695.66 100.00 7435.59 44.54 6504.09 38.96 2755.98 16.50 Total 107174.91 100.00 32111.94 29.96 46632.06 43.51 28430.91 26.53 Diagram 3, The layout of balances of China s local governmental debts by the end of 2010 4
(2)As far as the regional layout is concerned, as of the end of 2010, the governmental debt balances of the 11 eastern provinces (municipalities directly under the central government) and 5 municipalities specially designated in the state plan stood at 5.320839 trillion yuan, or 49.65. Those of the 8 central provinces stood at 2.471635 trillion yuan, or 23.06. And those of the 12 western provinces (autonomous regions and municipalities directly under the central government) stood at 2.925017 trillion yuan, or 27.29 (see Diagram 4). Diagram 4, The regional layout of China s governmental debt balances as of the end of 2010 (3) As far as the main groups of debt-raising, of the local governmental balances of debts at the end of 2010 is concerned, the financing platform companies and the local governments, departments and institutions raised debts separately amounting to 4.971068 trillion yuan and 2.497559 trillion yuan respectively, or 69.69 (see Chart 3 and Diagram 5 for details). Chart 3, The main structure of the local governments debt raising at the end of 2010 unit: 100 million yuan s with s with Type of debt Total of 3 types of debts government responsibilities of government responsibilities of Other relevant debts raising units repayment guarantee Ratio Fund-financing platform 49710.68 46.38 31375.29 46.75 8143.71 34.85 10191.68 61.04 companies Local governmental departments and 24975.59 23.31 15817.92 23.57 9157.67 39.19 0.00 0.00 institutions 5
Institutions with government subsidies 17190.25 16.04 11234.19 16.74 1551.87 6.64 4404.19 26.38 Public organs and government-affil 2498.28 2.33 1097.20 1.63 304.74 1.30 1096.34 6.57 iated institutions Other units 12800.11 11.94 7584.91 11.31 4211.75 18.02 1003.45 6.01 total 107174.9 1 100.00 67109.51 100.00 23369.7 4 100.00 16695.66 100.00 Diagram 5, Main structures of local governments debt raising at the end of 2010 (4) From the source of borrowing, of the local governments debt balances at the end of 2010, bank loans constituted 8.467999 trillion yuan, or 79.01 (see Chart 4 for details). Chart 4, Source borrowing of local governments debts at the end of 2010 Unit: 100 million yuan s with s with Type of Total of 3types of debts government responsibilities of government responsibilities of Other relevantdebts creditors repayment guarantee Ratio Bank loans 84679.99 79.01 50225.00 74.84 19134.14 81.88 15320.85 91.77 Finances 4477.93 4.18 2130.83 3.18 2347.10 10.04 0.00 0.00 6
from higher authorities Bond issuing Borrowings from other units and individuals 7567.31 7.06 5511.38 8.21 1066.77 4.56 989.16 5.92 10449.68 9.75 9242.30 13.77 821.73 3.52 385.65 2.31 Total 107174.91 100.00 67109.51 100.00 23369.74 100.00 16695.66 100.00 (5) As to the forms of the debt and the areas in which the funds are invested, out of the local governments debt balances at the end of 2010, there were 1.104447 trillion yuan in currency forms, i.e. money yet to spend, accounting for 10.31. The money already spent amounted to 9.613044 trillion yuan, or 89.69. 86.54 of the used funds covered the following areas: municipal construction, communication and transport, land collection and preservation, science, education, culture, public health and subsidized housing, water-conservancy projects in agriculture and forestry, public facilities and infrastructures (see Chart 5 for details) Chart 5, The areas in which the debt balances of the local governments were used at the end of 2010 unit: 100 million yuan s with s with Total of the 3 types government government Other relevant debts Areas in which debt of debts responsibility of responsibility of balances were used repayment guarantee Municipal construction 35301.04 36.72 24711.15 42.03 4917.68 22.55 5672.21 36.53 Communication and transportation Land overhaul and preservation 23924.46 24.89 8717.74 14.83 10769.62 49.39 4437.10 28.58 10208.83 10.62 9380.69 15.95 556.99 2.55 271.15 1.75 Education, science culture, public health and low-income housing Water-conservancy projects in agriculture and forestry Eco-conservation and environmental protection Fending-off financial risks of local governments 9169.02 9.54 4374.67 7.43 1318.02 6.04 3476.33 22.39 4584.10 4.77 3273.78 5.57 874.53 4.01 435.79 2.81 2733.15 2.84 1932.03 3.29 403.72 1.85 397.40 2.56 1109.69 1.15 823.35 1.40 281.29 1.29 5.05 0.03 Industry 1282.87 1.33 681.18 1.16 579.46 2.66 22.23 0.14 Energy 241.39 0.25 44.78 0.08 189.91 0.87 6.70 0.04 7
Others 7575.89 7.89 4858.12 8.26 1915.40 8.79 802.37 5.17 total 96130.44 100.00 58797.49 100.00 21806.62 100.00 15526.33 100.00 (6) As to the year of repayment of the local governments debt balances at the end of 2010, the of repayment in 2011 and 2012 will have been 24.49 and 17.17. That from 2013 to 2015 will have been 11.37, 9.28 and 7.48 respectively. And that in 2016 and beyond will have been 30.21 (see Chart 6 for details). Chart 6, Repayment projection of local government s debts at the end of 2010 unit: 100 million yuan Year for debt repayment with government with government Total of 3 types of responsibilities of responsibilities of Other relevant debts debts repayment guarantee Ratio 2011 26246.49 24.49 18683.81 27.84 3646.24 15.60 3916.44 23.46 2012 18402.48 17.17 12982.52 19.35 2972.07 12.72 2447.89 14.66 2013 12194.94 11.37 7991.36 11.91 2265.98 9.70 1937.60 11.61 2014 9941.39 9.28 6177.01 9.20 2273.31 9.73 1491.07 8.92 2015 8012.26 7.48 4934.69 7.35 1780.66 7.62 1296.91 7.77 2016and beyond 32377.35 30.21 16340.12 24.35 10431.48 44.63 5605.75 33.58 total 107174.91 100.00 67109.51 100.00 23369.74 100.00 16695.66 100.00 5) The overall situation of the debt burden The rate of debts for which the provincial, municipal and county governments bear the responsibility of repayment, i.e. the between the debt balances of the above type and the comprehensive financial potentials of the local governments at the end of 2010 was 52.25. In addition the debt local governments bear the responsibility of guarantee for or they themselves have, their debt rate was 7o. 45.The debt Local governments may take the responsibilities of guarantee for or they themselves have and other relevant debts of 2010 which the governments undertake certain responsibilities of rescue for, their overdue debt rate stood at 2.23 and 1.28 respectively. 2. The positive role played by borrowed funds of the local governments in promoting the economic and social growth of the localities. The audit shows that the borrowed funds of the local governments have played a positive role in 8
making up for local financial inadequacy, addressing crisis and countering natural disasters, improving the well-being of the people, protecting the eco-environment and boosting the sustained economic and social development of the localities. 1) The funds have provided financial support in addressing the crisis and countering natural disasters. In addressing the 1998 Asian financial crisis and the 2008 world financial crisis, the central authorities issued national bonds which were lent to local governments, and issued government bonds on behalf of local governments; the local governments strove to finance through financing platform companies so as to render financial support for the economic growth of the country. Following the massive earthquake in Wenchuan, local governments of various levels in Sichuan worked hard to raise governmental debts amounting to 55.8 billion yuan for post-quake reconstruction to facilitate the post-quake rehabilitation and reconstruction. 2) The funds rendered significant support to improve the well-being of the people and protect the eco-environment. As of the end of 2010, the debt balances used by local governments at various levels in education, medicare, science, culture, subsidized housing and water- conservancy projects in agriculture and forestry stood at 1.375312 trillion yuan, and those in energy-conservation, emission-reduction, eco-building and other industries amounted to 401.602 billion yuan. Thus they enhanced the growth of social undertakings, improving the eco-environment and facilitating the transformation of the growth pattern of the economy. 3) The funds have laid a foundation for the sustained economic and social growth. As of the end of 2010, of the debt balances already spent by the local governments of various levels, those used in communications and transport, municipal infrastructure and energy building stood at 5.946689 trillion yuan, or 61.86, and those used in land collection and preservation amounted to 1.020883 trillion yuan, or 10.62. The input of those funds has speeded up the infrastructure building of highways, railways and airports and the building of municipal projects of rail transport, roads and bridges. In so doing great amount of quality assets has been brought about, promoting the economic and social growth of various localities and the well-being of the people, giving impetus to the fulfillment of the 12 th five-year plan and strengthening the momentum for the economic and social growth in the years to come. 3. Main audit findings (1) Lack of standard for local governments debt-raising and financing In as much as the existing regulations do not vest the local governments with the right to debt-raising, there is a lack of standard for debt-raising and financing practices on the part of the local governments. The channels and forms in debt-raising and financing of different localities 9
greatly vary. Furthermore, debt-raising has been undertaken by a host of authorities with its procedures far from transparent. The audit shows that debt-raising was effected virtually in disguised forms by local governments through financing platform companies, while an amount of those funds became available through the provision of guarantees by government organs in an illegal way, and a few government organs and units even went the length of directly raising debts. It was found through audit that even after the issuance of the notice by the State Council concerning issues on upgrading the management of financing platform companies by the local governments (Guofa [2010] No.19, thereinafter referred to as the State Council [notice] ), 7 provincial, 40 municipal and 107 county governments and their affiliated departments still illegally provided guarantees of 46.475 billion yuan for debt-raising by financing platform companies in the forms of presenting letters of commitments or consolation, or with financial revenues and state assets of the administrative organs and public institutions. 2) The local governmental debt revenue and expenditure have not been channeled into budgetary control and the supervision over debts is not in place. Apart from local governments bonds and various financial loan transfers, most local governments debt revenue and expenditure have not been channeled into budgetary control and supervision with relevant control systems remaining imperfect. As of the end of 2010, of the 36 provincial governments, 7 have yet to formulate regulations governing the management on local governmental debts, 8 have yet to designate a unified debt-control department, 14 have yet to set up a system of reserve requirement funds for repayment of governmental debts and 24 have yet to establish mechanisms of risk forecasting and control. The problems existing in unsound management systems of municipal and county governments debts were even more conspicuous. There have long been problems in some localities of uncertain statistics in debt size and repayment responsibilities, that are not in place. 3) Due to the weak capabilities of debt repayment in some localities and trades and professions, there exists hidden danger of risks. First, few local governments shoulder heavy responsibilities for repayment of debts. At the end of 2010, the debt rate of 78 municipal and 99 county governments with responsibilities for debt repayment ran beyond 100, accounting for 19.9 and 3.56 of the total debt by the aforesaid governments. Owing to inadequate repayment capabilities, some local governments were left with the choice of repaying old debts by raising new ones. As of the end of 2010, the rate of the foregoing practice exceeded 20 on the part of 22 municipal and 20 county governments. s overdue have also emerged in some localities. The rate of overdue debts was over 10 on the part of 4 municipal and 23 county governments. Second, the repayment of debts of some localities depends heavily on revenue of land sales. At the end of 2010, of the debt balances with local governments responsibilities of repayment, the debt balances whose sources of repayment were revenues from land sales ran to 2.547351 trillion yuan, covering 12 provincial, 307 municipal and 1131 county governments. 10
Third, there were massive debts used for the building of expressways, universities of higher education and hospitals by some localities that were under heavy pressure of debt repayment. As of the end of 2010, of the debt balances of the local governments, those used for the building of expressways have stood at as high as 1.116811 trillion yuan. Of this, the debt with local governments responsibilities of repayment was 75.402 billion yuan, that with governments responsibilities of guarantee was 780.963 billion yuan, and that of other relevant debts was 260.446 billion yuan, respectively accounting for 6.75, 69.93 and 23.32. As the expressways of some localities were still under construction or at the initial period of open, fee collections were inadequate to repay the principal and interest of the debt, therefore the repayment is heavily dependant on raising new debts. In 2010, the rate of the above case concerning debts with government responsibilities of guarantee and other relevant debts reached 54.64. At the end of 2010, 1164 universities and 3120 public hospitals under various localities had governmental debts of 263.498 billion yuan and 97.774 billion yuan respectively. Of these, the rate of repaying old debts by borrowing new ones of 387 universities and 230 hospitals with government responsibilities of guarantee and other relevant debts in 2010 exceeded 50. The of repayment through borrowing new debts to repay old ones in that year was 54.247 billion yuan and 9.529 billion yuan. The debts of 95 universities and 575 hospitals were overdue, the being 2.718 billion yuan and 3.042 billion yuan respectively. Some localities have earmarked 44.138 billion yuan of financial funds for debt repayment. 4) Part of the governmental debt funds has not yet been used in time. At the end of 2010, the unspent of the local governmental debt balances totaled 1.104447 trillion yuan, of which debt balances raised from 2008 and the years before to the end of 2010 by some units affiliated to 34 provincial, 256 municipal and 942 county governments stood at 131.980 billion yuan, or 11.95. In 2010, 6.774 billion yuan was spent from financial funds to pay the interest. The chief reasons why these debt funds had not been used in time to reap benefits were: Some localities were devoid of a clear objective when raising debts; some were uncertain as to where the funds were to be invested; prepans were inadequate for some projects while some units were in greater hurry to borrow funds prematurely for fear of a tight money policy to be possibly pursued soon.. 5) Some units illegally obtained and used governmental debt funds. The result of auditing shows that some local governmental debt-raising, funds management and usage were not up to norm and the funds amounting to 108.253 billion yuan were obtained illegally. The chief manifestations are as follows: Some financing platform companies strove to obtain debt funds by using fake or illegal quality-based mortgage or overestimate the values of quality-based mortgage. Some localities and units invested debt funds in capital or real estate markets or used them to build office buildings, large halls and guest houses. Some units, in violation of national industrial policy, invested debt funds in projects that are energy-intensive, highly polluting and with excessive production capacities or with low productivity, or in overlapping projects. In addition, as discovered by the audit, there were losses and wastes running to 1.994 billion yuan. There were 12 clues that may lead to cases of violations of laws and 11
discipline economically. And now these cases are under investigations in accordance with the law. 6) The financing platform companies of the local governments are too large in numbers with sub-standard management. First, the number of financing platform companies is large. The financing platform companies of the local governments emerged in 1980s. At the end of 2010, the provincial, municipal and county governments set up 6576 such companies, i.e. 165 provincial ones, 1648 municipal ones and 4763 county ones. There were more than 10 such companies set up by 3 provincial, 29 municipal and 44 county governments separately. As far as the business scope of these companies are concerned, there were 3234 ones whose main function was financing for government construction projects, 1173 ones had the additional function of investment and construction, and 2169 ones were engaged in other business activities apart from playing the function mentioned above. Second, the debts size of the financing platform companies is large. At the end of 2010, the governmental debt balances of these companies stood at 4.971068 trillion yuan, or 46.38 of the local governments debt. Of this, those with government responsibilities of repayment amounted to 3.137529 trillion yuan, those with government responsibilities of guarantee were 814.371 billion yuan, and other relevant debts were 1.019168 trillion yuan, accounting for 63.12, 16.38 and 20.50 respectively. As to the levels, those of the province totaled 882.667 billion yuan, those of the municipality 2.684575 trillion yuan and those of the county 1.403826 trillion yuan accounting for 17.76, 54 and 28.24 respectively. As to the repayment pattern, 358 financing platform companies repaid old debts with government responsibilities for guarantee and other relevant debts running to 105.971 billion yuan through borrowing new debts, with the rate of repaying old debts of borrowing new ones standing at 55.20, 148 such companies has an overdue debt at 8.004 billion yuan, with the average rate of overdue debts standing at 16.26. Third, some of the above companies are devoid of standardized management and their profit-yielding capabilities are weak. There are no standardized control systems over these companies. The governance structure by legal persons of some companies is incomplete. There are multiple levels of internal management with a long chain, and the paid-in rate of capital funds is low. The audit discovered that 1033 such companies have problems such as false-financing, the registered capital being unpaid-in, illegal provision of funds and withdrawing them by local governments and departments, involving a sum of 244.15 billion yuan. As the investment of debt funds is mainly directed by these companies at projects serving public welfare or quasi-public welfare whose recovery of funds takes a fairly long time, their profit-yielding capabilities are rather weak. A total of 1734, or 26.37 are loss-making companies 4. Audit recommendations The emergence of local governments debt has historical and objective reasons; it has played certain positive roles in the local economic and social development. Yet, however there are certain problems in debt-raising, management and its use plus the hidden dangers of fairly big risks in some localities which we must set big store by. It is imperative to take effective measures, 12
properly handle existing debts, strictly control new debts, fend off or eliminate possible risks. To this end, it is recommended: (1) In conformity with the principle of whoever raises the debt should bear the responsibility, it is important to take positive and appropriate steps in addressing existing debts in light of different circumstances. With regard to debts arising from competitive projects, from public-welfare projects with business profits or from enterprises that have become competitive, the government responsibility of debt repayment should be relieved from. The repayment should be mainly done with profits reaped by various projects themselves, with appropriate financial subsidies from the local government if necessary. With regard to debts arising from public welfare projects yielding no returns but with government responsibilities of repayment, local governments should make repayment schemes and materialize them through budgetary arrangements. In localities, industrial and other units under heavy pressure of principal and interest repayment and under difficulties of debt repayment or under great debt risks, governments at various levels should monitor the changing situation and take effective measures to fend off or eliminate debt risks. (2) It is important to continuously press ahead with implementing standards guiding the cleanup of financing companies and put an end to the illegal practices of providing guarantee on the part of the local governments. In furtherance of the requirements in the State Council Notice, the localities should, in keeping with the principle of management according to classifications and addressing problems on the merit of each case, integrate financing platform companies and set up standardized rules for them to follow. Meanwhile, efforts should be made to work for diversification of the principal part of investment of the financing platform companies and the perfection of the legal person s governance structures through merging and reorganization, changing institutional systems, increasing companies capitals and introducing non-governmental investments. Unless otherwise stipulated by law and the State Council, the financing platform companies are not allowed to raise in disguised forms debts with government responsibilities of repayment and resolute measures should be taken against providing quality- based mortgage and commitments for illegal debt raising by financing companies and other units. It is essential to properly handle problems of financing for new projects and those underway by the above companies, keep a strict control over new projects with a view to preventing their excessive development. Regarding existing projects, it is imperative for local governments to strive for sources of follow-up funds through financial budgetary arrangements or utilizing markets so as to prevent the emergence of half-finished projects. (3) It is advisable to set up standardized mechanisms of financing by the local government and exercise overall supervision and the monitoring over the changing situation. We may study the possibility of vesting provincial governments with appropriate rights of debt-raising, gradually extend the rights to qualified municipal governments. Subject to the approval of the State Council, the debt-raising plan must include its compilation into the debt budget and its channeling into local budgetary control while being submitted to the corresponding people s congress for review and approval. As for other relevant debts than those with government responsibilities of repayment, competent authorities at all levels must be strict in reviewing them, giving approvals and controlling the dimensions and establish a system of files. They must perfect debt-supervision 13
systems and take as an important component the condition concerning borrowing, management, use and repayment in appraising the performances of the local governments and how they fulfill their economic responsibilities during their tenure of office. They must diversify responsibilities and carry them through and fend off violations of laws or excessive borrowing of debts in an attempt to enhance efficiency in the use of funds. In tackling these issues pointed out by the audit, relevant authorities and localities are working out rectification measures in keeping with the requirement of the State Council in an effort to formulate rectification measures and improve the control system concerning debts by the local governments. [1] In conformity with the requirements in the notice for perfecting the auditing work on the local government debts by the general office of the State Council (telegraph [2011] No.6 by the State Council general office), and with a view to diversifying the government responsibilities of repayment, this audit classify the local government debts into 3 categories in accordance with main bodies of law responsibilities. The first category in debts with government responsibilities of repayment, i.e. debts borrowed by the governments or their departments and repaid with financial funds. The second one includes probable debts with government responsibilities of guarantee, i.e. debts repaid with non-financial funds, or probable debts with local governments providing direct or indirect guarantees. And when debtors face difficulties of repayment, the governments must bear relevant responsibilities. The third one refers to other relevant debts, i.e. debts borrowed by relevant enterprises and public institutions on their own for public welfare projects, debts repaid with revenues from concerned units or the projects themselves. In this case, as the local governments do not provide any guarantee, they bear no legal responsibility of repayment; but when debtors face difficulties of repayment, the government may need to render certain assistance. 14