Exclusive: China seizes up to $157 billion of unspent local government budgets - sources

[September 14, 2015] By Benjamin Kang Lim

BEIJING (Reuters) - Angry Chinese authorities have seized up to 1 trillion yuan ($157 billion) from local governments who failed to spend their budget allocations, sources said, as Beijing seek ways to stimulate economic growth which is at its slowest for 25 years.

The huge underspend, linked to officials' reluctance to spend on big-ticket projects while authorities crack down on corruption, supports the argument of some economists that Chinese state investment has grown too slowly this year.

"In the past, local governments had asked for the money. Money was given, but no one acted," said one of two sources, both of whom are close to the government.

They declined to be named as they are not authorized to speak to the media.

"Investments were not realized, and the money will be reallocated," added the source, an economist. He did not elaborate on how the funds would be spent.

The repossessed money will pay for other investments, said the sources, as economic growth looks increasingly likely to fall below 7 percent.

Lackluster spending growth could be especially punishing for China, as investment is seen by some Chinese government economists as the best way to shore up activity in the short-term.

One trillion yuan of unspent funds is equivalent to about 6 percent of China's projected total government spending for 2015.

The Finance Ministry was not immediately available for comment when contacted by Reuters.

CORRUPTION CONNECTION

As part of sweeping reforms proposed by the Chinese government at the end of 2013, China is pursuing its boldest ever anti-graft campaign that has felled a powerful ex-domestic security chief among others.

While the campaign has been a hit with the public, it has also had the unintended consequence of scuppering investment as fearful officials eager to stay out of trouble resort to early retirement or dither over approving major projects.

That has annoyed Beijing, which has repeatedly threatened to punish procrastinating governments by recalling their unspent budgets. HSBC Bank estimated in May that China had 3.8 trillion yuan of unused fiscal funds carried over from previous years.

"Due to the crackdown (on corruption), most local officials have accomplished nothing," said the second source, who has ties to the leadership.

Official data showed investment accounted for slightly more than a third of China's economic growth in the first six months of this year.

Data over the weekend pointed to stubborn weakness in China's economy. Growth in investment and factory output both missed forecasts in August, suggesting that China needs to roll out more policy support to lift the world's second-largest economy.

(Reporting by Benjamin Kang Lim; Writing by Koh Gui King; Editing by Mike Collett-White)

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