Peering into the murky world of local government finance in China has become an art form. With limited data, building a big picture can at times resemble painting a masterpiece without mixing primary colors.

To illustrate the complexity of the problem, the Shanghai University of Finance and Economics conducted its annual survey on the 31 provincial-level regions on their assets and liabilities.

The results were released just before the festive season and they were startling.

High-tech and manufacturing hub Guangdong topped the poll when it came to transparency. The South China province scored 69.38 after supplying nearly 70% of the information requested by researchers from the university’s Public Policy Research Center.

Least transparent was Jiangxi, which is situated in the southeast of the country, with a rating of just 26.98.

The average score was 53.49, an increase from 48.27 in 2017.

“[But] the general level of transparency in China’s local governments remains poor,” the study concluded.

While progress has been made, what stood out was the Guangdong statistics.

Tech titans

Last week the region, which is home to tech titans Tencent and Huawei, stopped releasing monthly updates of a crucial indicator that gauges growth momentum in the massive manufacturing sector.

The decision was taken after the central government’s National Bureau of Statistics claimed that the local purchasing managers’ index, or PMI, on factory activity was “illegal.”

Since the coastal province, which includes Shenzhen, is a major export manufacturing hub, the move raised a few eyebrows.

“The mainland economy is under pressure, as we see consumer and factory data are very weak. Actual private sector and consumer demand are weakening. The absence of the economic data would only exacerbate suspicion [about the true condition of the economy],” Shen Jianguang, the chief economist at JD Finance, said at the time.

Still, there are broader implications when pouring over the numbers from the study compiled by the Shanghai University of Finance and Economics.

One aspect that leaps out is the limited information on “off-balance sheet” local government debt.

During the past three years, President Xi Jinping’s administration has made this a priority with the People’s Bank of China warning of the dangers this poses to the economy.

In September, economist Liu Shijin, a member of the Monetary Policy Committee of the PBOC, pointed out that excessive investment in infrastructure and property projects was not the long-term answer to China’s growth dilemma.

“Although investment in building roads, railways and housing can play a role in preventing a precipitous decline in growth, its potential to drive economic expansion over the long run has waned,” Liu said, adding that this would only exacerbate the country’s deleveraging problems.

‘Credit risks’

A month later, the alarm bells were deafening after S&P Global, one of the “Big Three” credit rating agencies, rolled out a report on the scale of the “credit risks” facing Beijing.

“The extent of off-balance-sheet borrowing among local governments isn’t known, but could be as high as 40 trillion renminbi (US$5.78 trillion),” the study revealed. “That’s a debt iceberg with titanic credit risks.”

Most of the “hidden debt” is festering in local government financing vehicles, or LGFVs, which were set-up by state-owned companies to raise funds for infrastructure and development programs.

Usually, this sort of “off-balance-sheet borrowing” is done outside the normal channels of central government, which Xi’s administration is determined to crack down on.

Tighter regulations have been brought in during the past 12 months, but the addiction to debt remains, squeezing spending on health care, social security and welfare, as well as environmental issues.

“Local government officials never worry about repaying debts, they only worry that no one is lending them money,” Yin Zhongqing, the deputy director of the financial and economic affairs committee at the National People’s Congress, said earlier this year.

“Part of the reason was that all local governments are part of a centralized authority that will eventually be bailed out.”

To defuse this fiscal time bomb, Beijing plans to launch a new evaluation system for central and local budgets and improve “transparency, accountability, and efficiency.”

Finally, the picture of China’s murky world of debt is being brought into sharp focus.