A township government in Shanghai reportedly borrowed 2 billion yuan ($293 million) in 2008 under the cover of a national high-speed railway project to repay debt, highlighting the risk of spiraling local government debts.

Beijing-Shanghai high- speed railway was?under construction.[File photo]

The Guangzhou-based 21st Century Business Herald reported the news on Wednesday, citing an audit document that was allegedly filed by the National Audit Office (NAO) in 2009 and recently obtained by the paper.

The case reveals the huge pressure placed on China's regional governments to finance their spending as China boosts its economy with a 4-trillion-yuan stimulus plan.

However, Xiao Fei, an information official with the NAO, told China Daily on Wednesday that she was unaware of such an audit document.

The NAO did not provide the newspaper with this document, she said.

According to the report, in 2009 preliminary national audits found that the Jiangqiao township in Shanghai had obtained loans totaling 2 billion yuan from two banks through a local financial institution owned by the township government.

It promised to invest the funds in projects related to the Beijing-Shanghai high- speed railway, such as land requisition and resident relocation.

The Beijing-Shanghai high-speed railway will link the country's capital with its financial center. A total of 217.6 billion yuan is earmarked to be invested in the project, though it will not cover land or displacement costs.

In April 2008, railway construction began in Jiangqiao, where a section of the Beijing-Shanghai railroad will be located. The local government requisitioned about 270 hectares of land as of early this year.

Part of the funds have since been found to have been used to finance various property development projects that had nothing to do with the construction of the high-speed railroad, according to the newspaper report.

"We were under heavy burdens to repay debt at that time," an unnamed source inside the township financial firm told the newspaper.

In August 2008, the cash-strapped town faced difficulty paying back debts of an overall amount of about 2 billion yuan. It also had no more projects in the pipeline through which it could acquire new bank loans.

The situation deteriorated further as funds allocated by the township's superior authorities for the high-speed railroad project were delayed, forcing the township government to use its own funds to partially finance the relocation of residents.

The local government eventually took advantage of the project to seize new loans for the repayment of some of its debts, reported the newspaper, quoting local officials.

In October 2009, the discipline inspection commission in Shanghai launched an investigation into the misused loans, resulting in the municipal government of Shanghai ordering the township to return all the loans early this year.

The case highlighted the risks involved in the accruement of massive debts by local government.

Chinese provinces and municipalities are not allowed to directly issue bonds, apart from a limited pilot program launched last year, but they have set up more than 3,000 commercial financial institutions through which they have borrowed heavily.

According to some media reports, the financial arms of local governments have borrowed some 6 trillion yuan.

Victor Shih, a researcher with Northwestern University in the United States, estimated that China's total local government borrowing from 2004 to 2009 was around 12 trillion.