IN a much-anticipated move, Chinese auditors revealed on June 23 for the first time the gargantuan debts local governments have hitherto incurred.

Altogether 18 provinces, 16 cities and 36 counties that were audited had accumulated debts to the tune of 2.79 trillion yuan (US$410.7 billion) as of 2009.

Although China's local government debts have no origins in the Greek debt crisis, they could conceal a bigger, systemic risk, which, if left unchecked, could spell endless trouble down the road.

Of course, China's debts are domestic, hence are not vulnerable to Western economic vagaries that called into question the solvency of indebted nations like Greece.

Greek debts are sovereign debts, which means defaulting on them would reflect badly on the country politically.

China's local debts are dissimilar in that local governments - and even the central government - aren't necessarily haunted by the specter of insolvency even if they run up mountainous debts.

The Greek economy had registered sluggish growth for years before it hit the skids.

The country has a bloated public sector and few profitable industries other than tourism and ship building - the fortunes of which are closely related to the general economic well-being - to sustain its prosperity.

This dual weakness has impaired Greece's ability to repay debts when financial crises hit. By contrast, debts as a share of GDP are relatively low in the economic powerhouse that is China.

Simply put, the proportions of local debts are dwarfed by China's strong state finances and breakneck growth.

Exhilarating as it is, growth may also have provided officials with a convenient excuse for studiously ignoring the proverbial elephant in the room - that local and state finances are perennially undermined by bad investments, vanity projects and over-construction.

Now that it's clear what got Greece where it is now, the country can decisively reform its wretched economy as long as its people and government are determined to cut back on lavish public spending and profligate consumption.

Frugality, however, is unlikely to alleviate China's debt woes, which are very different from those afflicting Greece.

Boosterism

The landmark 1994 fiscal reform in China resulted in a big chunk of taxes collected in the provinces ending up in state coffers.

That meant that local government bosses, with a shrinking pool of resources, should have exercised fiscal discipline.

They haven't.

In a bureaucracy where regional bosses' ability to deliver growth represents their ticket to the top echelons in Beijing, it's no wonder that the debt load - a result of cynical boosterism on the part of officialdom - has shown no signs of easing.

Greek authorities and China's local governments both are overly optimistic about the momentum of their economic growth.

Before the debt fiasco unfolded, Greece had expected its tourism industry to stay buoyant forever on the back of a world economic boom.

Besides, a robust euro-zone economy would provide the necessary fuel for its upswing. But all this wishful thinking came to an abrupt end when downturn reigned and exposed, to the chagrin of average Greek citizens, the extent of their country's unsustainable public expenditures.

China's local governors have been as sanguine about the dynamism underpinning their country's real estate industry.

Even when Beijing finally intervened to rein in the housing frenzy, local bosses still harbored the illusion that Beijing could put itself in their shoes and announce watered-down measures against their cash cow and key source of political clout.

Falling demand of late for homes and a pile of unperforming loans that emerged in its wake have brought these botched official gambits out in the open.

When Athens was revealed to be dressing up its indebtedness to make Greek financial statistics appear in line with standards stipulated in the Maastricht Treaty, the danger of moral failing was even greater than the embarrassment.

Likewise, Chinese local governments are latching onto whatever opportunity that comes their way to generate glamorous GDP figures. Whether these opportunities are tailored to local conditions is not their concern.

Local officials lay their creditworthiness on the line by borrowing enormous loans from banks that they may one day default on.

Hidden debts

When insolvency looms, they can either turn to Beijing for bailout or shift the risks to their successors.

After all, government investments in infrastructure projects are often welcomed by the local populace, even though everyone knows things could go badly awry when hidden debts implode.

For all the difficulties that arose in restructuring Greek sovereign debts, the possibility of the crisis growing more intense seems distant.

In contrast, China's local debts may be a chronic headache for the authorities. The country is still saddled with unresolved debts left from the days of a planned economy.

Despite the stimulus package, local governments will probably sink deeper in the abyss of fiscal deficit as the institutions that support growth are continually flawed and growth is so far generated by the visible hand of administrative fiat, not the invisible hand of the market.

These problems will impact on China's economic vitality in the post-crisis era and hinder its transition from an exports-driven economy to a consumption-based one.

The reason is straightforward: as ballooning government debts suck public money to plug the holes they create, there will be fewer resources for the market.

What's more, people tend to save more and spend less to avoid tax burdens and hardship caused by inflation.

If they do spend at all, they are likely to invest heavily in financial products with high yields like, say, properties.

In conclusion, although China's local finances are in dire straits, this doesn't presage a coming debt crisis like the one that gripped Greece.

But make no mistake: the highly unlikely probability of a debt debacle in the immediate future doesn't diminish any less the long-term damage of massive local debts to China's economic health.

And the country will become less capable of withstanding external shocks if nothing is done to relieve its excruciating debt pressure.

(The author is professor of finance and executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)