Tighter controls set on local govt loans (2)

"Despite increasing funding constraints, local governments have resorted to trust financing and bond issuance, and enjoyed low financing costs incompatible with the underling risks, due to perceived implicit guarantees or bailout prospects," said Chang Jian, China economist with Barclays Capital.

Concerns over government debt in the world's second-largest economy have intensified since China introduced a 4 trillion yuan stimulus package in 2008 and later tightened the reins on its white-hot real estate market, which affects local government land sales, a major contributor to their fiscal revenue.

And slower-than-expected growth of 7.7 percent in the first quarter may add an element of uncertainty to regulators' resolve to control local government lending in a tougher way, said analysts.

"While policy is unlikely to loosen further given Premier Li Keqiang's latest comments, which followed a chorus of concern over China's high debt level and the associated financial risks, we expect growth to slow toward 7.3 percent in the second half, putting pressure on the government to loosen policy," said Zhang Zhiwei, chief China economist at Nomura Holdings Inc.

He said growth at a rate below the government's target of 7.5 percent would put policymakers under further pressure and runs the risk of a policy mistake being made in the second half - loosening policy to stimulate growth, which would boost growth in 2013 but exacerbate risks in the years ahead.

The CBRC also required its regulatory bureaus at local level to summarize the repayment situation of such loans, and maintain regular communication with local governments to avoid significant defaults.

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