China: Tight curbs on indebted universities

By Yojana Sharma. Local authorities in China have tightened up on debts owed by universities amid fears that big-spending institutions may default on their loans. The move could affect a number of international university collaborations where local and provincial authorities have agreed to fund major construction projects.
According to China's state-run media, provincial and municipal governments are urging indebted universities to repay loans after the National Audit Office reported at the end of 2010 that some 1,164 colleges were burdened with around CNY263.5 billion (US$41.5 billion) as a result of profligate spending over the last decade.
Strict new policies have been introduced to curb new university expansion not approved in the pipeline before 2009. Other capital projects such as expensive reequipping of laboratories and new dormitories will also be frozen, as local governments have had to step in to bail out universities that overreached themselves.
In Kunshan near Shanghai, the policy has reportedly led to cutbacks on new buildings for the planned US Duke University campus financed from Kunshan city coffers. Construction of a building to house research facilities and laboratories has been postponed indefinitely, according to Chinese sources in Kunshan. The building was intended to house Duke's Global Health Institute offering special masters-level courses in China from 2012.
A number of essential buildings will be completed at the Kunshan site, but with the freeze on non-essential projects lasting until 2012, construction of the laboratory building may not resume until 2013 under current policies. In east Anhui province, new infrastructure projects linked to university campuses will not be approved if the campuses currently have the capacity to accommodate all students, according to Yang Delin, deputy director of Anhui's education department.
Universities in Anhui are strictly forbidden to take out bank loans or borrow money from other sources without government approval, Yang was quoted in the official China Daily newspaper as saying. "For those that don't pay back loans the government will cut funding used to help them pay back loans," Yang said.
In an urgent document signed by the ministries of finance and education, on reducing the debts of local higher education institutions and issued by the central government at the end of last year, every province must report the details of university debts to the central government. According to the document, "each province must develop their own plan of how to dramatically reduce university debts. If they do this they will get money from central government to reduce the debt principal - but not the interest," said said Qiang Zha, an associate professor in the faculty of education at York University in Toronto and a research fellow at Shanghai's Fudan University, who is familiar with the government document.
The move will effectively write off a proportion of the debts incurred before 2009 if universities agree to cut back on spending. In the richest provinces of Guangzhou, Jiangsu and Zhejiang some 10% of the debt will be effectively written off, with the central government providing that money in the form of a cash grant to the provincial government. But in poorer provinces they will get back as much as 45% of the principal from the central government if they are able to show a major reduction in university debt.
"This provides an incentive. If they don't reduce their [existing debt] they won't be able to get these large sums of money from the government," said Qiang. "They borrowed without thinking about capacity [to pay] and now they get substantial help - it is like a freebie for provincial governments."
Local governments will not be allowed to borrow from sources other than state-run banks to fund university projects. In recent years funding for university initiatives was sought from shadowy 'investment companies', wealthy individuals and other lenders charging usurious interest. But bank loans are becoming harder to get amid a credit squeeze in China. In central Hubei province local education authorities have urged universities to pay back all CNY13.3 billion of loans in the next five to eight years, some of it by selling underused university land.
Wuhan University in the Hubei capital of Wuhan is collaborating with Duke and Kunshan city on global health research projects at the Kunshan campus. But Wuhan city itself is regarded as one of the 10 most indebted in China, with banks there saying they have stopped lending to local government projects unless profitability is guaranteed. In Anhui the provincial government's education department last month created a university debt database to track the progress of all university loan repayments. Universities and local authorities now have to report their efforts to reduce debt on a monthly basis, said Qiang, who is also a former advisor to Anhui provincial government.
Qiang said 2010-12 was "a period to help local universities. It is clear that the debt must be reduced now because after 2012 provincial universities will not get any more financial help from the central government."