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Deep in the red - Chinese county pays price for vanity-project binge


By Shu Zhang and Ryan Woo
RUCHENG COUNTY, China (Reuters) - In the heart of an impoverished village in southern China, a life-sized statue of Mao Zedong sits on a platform adorned with intricate stonework, flanked by a diorama of Red Army soldiers and traditional brick-and-tile homes with curved roofs.
Officials have spent a small fortune on the project that has transformed the village of Shazhou, in Hunan province, into an open-air museum dedicated to the Chinese Communist Party. But few tourists have come to peer at the inscription at the foot of Mao's statue, or take selfies in front of the heroes of the revolution.
The "red tourism" project was the brainchild of the former Communist Party chief of the local county, Rucheng, and cost 300 million yuan (). But it has yet to produce a profit, just like the string of public gardens, town squares and office buildings that the county has built in recent years.
Now the clock is ticking as Rucheng, among China's poorest counties, and with a population of just 420,400 people, is under pressure to resolve $1 billion in debt, following a decade of credit-fuelled vanity projects, three local officials told Reuters. They requested anonymity due to the sensitivity of the matter.
To raise funds and conserve cash, Rucheng - which doesn't have a train station or an airport - has been slashing public investment in infrastructure projects and increasing government land sales to generate revenue, the officials said.
Rucheng is not alone - hundreds of other indebted counties in China are in the same boat. In a recent financial stability report, the central bank said that much of China's hidden debt risk is held at lower-tier levels, meaning prefectures and counties like Rucheng.
As China prepares this month to celebrate the 40th anniversary of the economic reforms that transformed it into the world's second-largest economy, fears over local government debt are growing.
China's local governments had 18.4 trillion yuan of outstanding debt at the end of October, and were estimated by S&P Global Ratings to have up to 40 trillion yuan in off-budget borrowing.
Of particular concern to the authorities as they tackle risks in the financial system are those governments with tiny revenue streams relative to their debt. Their over-reliance on income from land sales is also driving asset bubbles in China.
Rucheng's free-spending ways came onto Beijing's radar this year when visiting anti-corruption inspectors were shocked by the contrast between the county's newly built but deserted municipal district and cramped older areas where residents drink polluted water from ageing pipes.
When the inspectors were in town, numerous anonymous complaints arrived in the mail.
Since 2008, Rucheng has spent billions on 10 office buildings, 11 public gardens and squares and 26 urban roads, the anti-corruption inspectors found. But less than 6 percent of government spending went on investing in industry.
Vanity investments helped drive Rucheng's debt ratio - or borrowing relative to fiscal revenue - to 336 percent last year from 286 percent in 2016, and 274 percent in 2015.
"We must rectify the problem according to what is required of us, otherwise the local people will not trust our government officials anymore," said one of the officials.

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