When the city of Detroit filed the largest municipal bankruptcy case in U.S. history, well-known economist Lang Xianping warned that the event was a wake-up call for Chinese cities, saying, "China is probably facing 330 Detroit-like crises."

The popular economic commentator wrote on his Weibo microblog that the latest statistics released by the National Audit Office (NAO) in June put the average debt of the 36 local governments from which the statistics were drawn, at $17.4 billion, almost matching Detroit's $18 billion debt.

In 2011, the NAO published a nationwide audit report revealing that local government debt exceeded 10.7 trillion yuan ($1.74 trillion) at the end of 2010, about 27 percent of China's GDP.

Two weeks after Detroit's bankruptcy application, China's NAO embarked on a comprehensive audit of government debt. This is the second time that China has tried to calculate how much money is owed by all levels of government. Starting on August 1, NAO auditors and provincial audit officers were sent to different levels of local governments.

Unlike the 2011 audit, which focused only on three levels of government (provincial, municipal and county), this year's investigation extends to township and village authorities. "The new audit will improve the limited transparency around the amount of outstanding local government debt," said credit rating agency Moody's Investors Service.

The review could possibly be a tool for anti-corruption as well, revealing cases involving some officials, said Ye Qing, Deputy Director of the Statistics Bureau in Hubei Province.

The audit result will be reported to the Central Government in October.

In the meantime, speculation about the audit is running wild. According to Moody's calculations, China's local government debt totaled 12.1 trillion yuan ($1.97 trillion) as of the end of 2012. Dong Dasheng, Deputy Auditor General of the NAO, has estimated that the final number should be between 15 to 18 trillion yuan ($2.9 trillion), equivalent to 29-35 percent of China's GDP.

One city that may be deeply in debt is Ordos City in China's Inner Mongolia Autonomous Region. The city has been called a "ghost city" by mass media for its many neighborhoods of unoccupied housing, and is reported to be buckling under the weight of an estimated debt of over 200 billion yuan ($32 billion).

However the Chinese Government's debt-to-GDP ratio is much lower than those of more developed economies, according to Zeng Gang, a researcher from the Institute of Finance and Banking at the Chinese Academy of Social Sciences. The U.S. Government's debt stands at over 100 percent of the country's GDP.

"It doesn't matter how high the figure is. The level of debt is defined by the local government's ability to pay back what they owe," said Guo Tianyong, Director of the Banking Research Center at the Central University of Finance and Economics. "According to the statistics we see now, it's relatively high."

This view is reinforced by the China Banking Regulatory Commission, which says that local governments took up 80 percent of total bank lending in China at the end of 2010.

Under China's budget laws, local governments are forbidden from taking on debt directly, so a Detroit-like bankruptcy will never happen. But local governments borrowed heavily through certain types of investment firms known as financing vehicles. To promote urbanization, much of their borrowings went into public infrastructure, which has yielded low financial returns. As a result, many local governments relied on land sales to repay old debts. But revenue from land sales is on the decline.

The existing debt pushed localities to borrow more. Auditor General Liu Jiayi said one example of this type of borrowing was a loan of about 45.4 billion yuan ($7.4 billion) taken out for the purpose of repaying debts incurred by the construction of highways in 2012.

"To seek a solution, the Central Government should pose restrictions on local authorities' actions in the future," said Guo. "A debt ceiling must be set according to their disposable revenue." CA

∗ zhengyang@chinafrica.cn