China's fast expanding universities are accumulating debts which they may not be able to repay, a report from the country's powerful economic planning agency has warned.

The National Development and Reform Commission report reveals that China's 2000 public universities had racked up loans of 200 billion yuan (US$26.7 billion) by the end of 2005. 

The problem runs right the way through China's higher education system and involves some of China's highest ranking universities. A recent study by Peking University's Graduate School of Education indicates that the 76 universities affiliated to the Ministry of Education, which includes some of China's most prestigious institutions, were 33.6 billion yuan (US$4.5 billion) in debt - a figure that accounts for 51 per cent of their average revenues from tuition fees and government funds,.

A doctoral dissertation by Lin Li from Xiamen University suggests that some universities may already be cracking under the strain. Of the 15 universities that responded to her enquiries last year, four said they had already run into problems repaying their loans, while 10 expected to encounter difficulties soon. The only university that did not have any concerns said the local government had agreed to repay the principal of its loan.

Lin's study indicates that most of the cash has been used to construct office and dormitory buildings, new campuses, and even college towns, with hardly any going to fund research.

Guangzhou College Town has been under construction since 2004. Many Chinese universities have racked up huge debts to finance new buildings. © Hepeng Jia / Chemistry World

The problem can be traced back to the huge rise in the number of students attending Chinese universities since the mid-nineties. College student numbers increased from less than 4 million in 1998 to 18 million in 2006, putting immense strain on teaching and residential facilities.

Short of cash, local governments and universities turned to commercial banks, which were eager to get high quality clients.

'It is not wrong for universities to borrow money from banks, but it is abnormal for them to borrow so much money in such a short period,' says Zhang Yinan, a research fellow at Central Institute of Education.

The surging debts are now ringing alarms in government. The Ministry of Education vowed in early September to help universities solve their debt problems. Locally, Jiangsu and Henan provincial governments are pushing universities to sell their old campuses in city centres to repay their loans.

Shen Yong, a researcher at Tsinghua University's School of Public Policy and Management, blames a lack of risk awareness among university chiefs for the problem.

Zhang agrees. 'I think a long-term solution will need universities to operate more independently and responsibly, and the competitions between them should be based on real academic outputs instead of luxury buildings,' he told Chemistry World.