China says local debt risks can be controlled

AP News
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Posted: Aug 15, 2011 7:51 AM
China says local debt risks can be controlled

China's finance ministry tried Monday to allay concern about billions of dollars in bank loans owed by local governments, saying risks can be controlled and officials are looking at ways to ease the burden.

It was Beijing's most detailed comment since disclosing in June that local governments have piled up 10.7 trillion yuan ($1.6 trillion) in debt, the equivalent of 25 percent of China's annual economic output. Much of that is owed to state banks, prompting concern they might face problems if borrowers default.

The finance ministry gave no details of individual borrowers but acknowledged in a report that some have a "weak ability to repay" money lent for public works and other expenses. It said others should be in good shape because they have adequate tax revenues, access to land and other resources and high economic growth.

"Our country's local government debt risks are generally controllable," said the report on the ministry website. Still, it said, "the ability of some local governments to repay their debts is weak and there exist some risks."

Private sector analysts say a banking crisis is unlikely because China state lenders are flush with cash and can absorb possible losses. Some suggest the cash crunch is likely to force Beijing to assume some local government debts or spur the creation of a municipal bond market to let local authorities raise money.

Chinese local governments borrowed heavily over the past decade to build subways and other infrastructure and to expand access to school and other social programs that Beijing promised but didn't finance. Borrowing increased after Beijing ordered higher spending on public works as part of its stimulus in response to the 2008 global crisis.

Analysts estimate local governments might be unable to repay 25 to 30 percent of their borrowing, or up to 3.2 trillion yuan ($490 million). Some 25 percent of the total is due this year.

Monday's report said the finance ministry will study the possibility of allowing local governments to issue bonds to repay their debts.

Many private sector analysts have said they expect such a move to allow cities and other local governments to sell bonds, which typically have a longer repayment period. They say creating a municipal bond market also would increase investment opportunities for Chinese households.

The ministry also said it has taken measures including "resolutely forbidding" local governments from engaging in any irregular measures to take on new debt.

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Chinese Ministry of Finance (in Chinese): http://www.mof.gov.cn