China will start a nationwide audit of government debt this week as the new Communist Party leadership investigates the threats to growth and the financial system from a record credit boom.

The State Council, under premier Li Keqiang, ordered the review, the National Audit Office said in a statement yesterday.

The office suspended other projects for this “urgent” work requested on July 26th and will send staff to provinces and cities this week, People’s Daily reported yesterday on its website, citing sources it didn’t identify.

Chinese stocks fell as the first full audit in more than two years underscored dangers to the economy from borrowing by local governments and an expansion of non-traditional sources of credit.

The new leadership oversaw a showdown with state-owned lenders last month as the People’s Bank of China engineered a cash squeeze to pressure banks to better manage their liquidity and assets.

"Local-government debt has become a focus in recent years and is a source of concern about China's growth," said Ding Shuang, senior China economist at Citigroup in Hong Kong, who previously worked for the International Monetary Fund.

“The new leadership is trying to give a clear answer.”

A report on July 27th showing Chinese industrial companies’ profit growth slowed to 6.3 per cent in June from a year earlier, compared with a gain of 15.5 per cent in May.

Last week, China announced what Bank of America called a "small stimulus," expanded a crackdown on wasteful government spending and ordered cuts in manufacturing overcapacity, as new leaders grapple with a slowing economy and public concerns ranging from house prices to corruption.

Efforts to sustain growth include small-company tax breaks and speeding up railway construction, while frugality measures include a five-year ban on building government offices.

Bloomberg