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          Money

          Lenders, officials urged to keep tight leash on local debt units

          (China Daily)
          Updated: 2010-06-15 09:08
          Large Medium Small

          BEIJING - Chinese officials and banks must clean up their financing of local government-backed investment units under rules unveiled on Sunday, even as a top government think-tank expert said the overall situation is "far from dangerous".

          Lenders, officials urged to keep tight leash on local debt units

          Workers at a construction site in Shanghai. [PROVIDED TO CHINA DAILY ]

          The State Council, or the cabinet, issued a directive warning that some of these quasi-independent financing vehicles, often used by local governments to fund infrastructure projects, were dangerously loaded with debt built up using implicit assurances to banks from local officials.

          It marked the country's latest effort to tackle the mounting debt worries of local governments, which analysts have warned could become financial time bombs.

          Chinese provinces, cities and towns have used the investment subsidiaries to circumvent restrictions on their own borrowing, and many of these units borrowed heavily in 2009 to fund an infrastructure-spending spree.

          Experts have come to various estimates of the local government debt, ranging from 6 trillion yuan ($878.5 billion) to as much as 11 trillion yuan. The country's GDP totaled about 33 trillion yuan in 2009.

          "There is no definite conclusion as to the real amount of the local debt," said Jia Kang, director of the Institute of Fiscal Science Research at the Ministry of Finance. But the ratio of China's overall public debt to its GDP, calculated based on the median level of existing estimates of surging local government debt, is about 50 percent even if the country's all types of hidden debt is taken into account, he told China Daily on Monday.

          It is lower than the warning line set by the European Union, he said.

          In the latest directive, the State Council said these investment platforms "have experienced some problems that demand urgent attention."

          Related readings:
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          Lenders, officials urged to keep tight leash on local debt units China banks say local debt risk 'controllable'
          Lenders, officials urged to keep tight leash on local debt units Banks running out of lending quota
          Lenders, officials urged to keep tight leash on local debt units Banks lend less in May as stimulus winds down

          "The main ones are that the scale of debt-driven financing of these investment vehicle companies has inflated rapidly, their operation is not sufficiently regulated; local governments have violated regulations and provided implicit (loan) guarantees and the risks from debt obligations have been constantly growing," said the directive.

          It also said some banks have shown "weak grasp of risks" and failed to police loans to these local investment units properly.

          Some economists have called the debt of local government a growing risk to Chinese public finances, with questions raised about the future returns on many of the projects launched as part of the stimulus program to counter the financial crisis.

          The State Council directive ordered banks to "strictly regulate credit management" for the investment vehicles, and it told local officials to avoid using government revenues, State-owned assets and other "direct or indirect" collateral for loans to these companies.

          Reuters-China Daily

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