(Yicai) Dec. 23 -- Seven provinces have cleared CNY3.34 billion (USD475 million) of illegally incurred hidden debt flagged by an official audit this summer, according to a National Audit Office report, as China’s financial regulators step up corrective measures.

Three regions repaid CNY3.2 billion of implicit debt accumulated by letting state owned enterprises fund construction projects in exchange for fiscal funds, and two others paid back CNY115 million (USD16.4 million) they illegally raised from public welfare bodies, the report showed yesterday.

Hidden debt -- local government borrowing not recorded on official balance sheets -- poses significant systemic risks. The Ministry of Finance, the People’s Bank of China, and the National Financial Regulatory Authority identified the violations in June and have since gathered data to coordinate their cleanup.

Five regions generated CNY5.9 billion of hidden debt by using SOEs to advance construction funding repaid from public budgets, the NAO’s audit found. Meanwhile, 15 local financing vehicles across 11 regions raised CNY150 million (USD21.3 million) in implicit debt from over 1,600 individuals, 45 charities, and village collectives through non-standard financial products and loans.

The audit also discovered that some local governments falsely “resolved” CNY2.3 billion of liabilities by directly altering debt ledgers, recategorising government debt as corporate debt, or using new borrowing to repay old obligations.

Moreover, the NAO found that 18 SOEs and local government financing vehicles in 17 regions had illegally pooled nearly CNY4.7 billion of agricultural loans held in the names of names of villagers and village collectives and used the funds to service their own debt principal and interest. So far, nine regions have returned CNY1.8 billion of such improperly collected loans.

According to the NAO, 98 percent of the 2,186 issues that required immediate correction were rectified as of Sept. 30, and timetables and roadmaps for the remainder have already been drawn up.

The three financial watchdogs blamed these problems on a lack of long-term planning at the local level, short-term borrowing to chase performance targets, and illegal fundraising to plug fiscal gaps. They also faulted insufficient cross-department supervision, incomplete data sharing mechanisms, and weak accountability measures for failing to deter violations.

The PBOC pledged to enhance information sharing with local governments and financial regulators, keep a close eye on disguised or irregular debt reduction behavior, and guide financial institutions to support the debt resolution of LGFVs

For its part, the NFRA vowed to instruct banks and other financial institutions to implement policies supporting debt resolution, and to legally and compliantly carry out restructuring and replacement of existing LGFV debts.

Editor: Futura Costaglione