China’s local government debt soared to US$1.7 trillion, or about 27 percent of the nation’s gross domestic product in 2010, according to Liu Jiayi, the top auditor in China. At a time when Beijing is tightening the economy by reining in bank lending to moderate growth and tame inflation and property prices, the head of China’s national audit office warned Monday that the country was facing growing risks because of a sharp rise in local government debt and poor controls over borrowing by investment companies set up by municipalities, provinces and other bodies. Meanwhile, neighboring India, which has alway been saddled with the burden of a huge national debt to GDP, has been showing signs of a lowering public debt. Still much higher than China, India’s public debt fell from an estimated  US$1,180 in 2008 to US$1,020 in 2010; clocking more than 60 percent of GDP, as against China’s 44 percent.

China which has employed a liberal lending policy post the financial crisis of 2008 a US$586 billion stimulus package in late 2008 and a huge wave of state-backed lending that took place in 2009 and 2010, to keep the economy bouyant while the rest of the world sank, is now facing harsh debt conditions. “The management of some local government financing platforms is irregular, and their profitability and ability to pay their debts is quite weak,” Mr. Liu said in a speech Monday. Supporting rising fears in the country, Prime Minister Wen Jiabao, who was visiting Britain, told Hong Kong television that the economy would probably exceed its inflation target of 4 percent this year.

These gashes though are feared to expose some hidden wounds that analysts fear could push the Chinese economy into a tailspin, bringing forth the ghosts of 2008. “The property sector is feeling the pinch from government policy tightening, and it takes time for government-invested projects to generate returns,” said Hua Zhongwei, an analyst with Huachuang Securities in Beijing. “These will create big pressures on local governments to repay their debt.” To contain the problem, the audit office said financing vehicles would be “firmly” barred from incurring new debt, while local governments would be allowed to sell bonds, but only with approval from Beijing.

Gearing themselves to clean the house of debt before elections next year, Beijing is keen to rid itself of the incurred debt burden. The problem won’t be too big for the world’s second largest economy and owner of US$3.05 trillion, the world’s largest foreign exchange reserves.