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Assuaging concerns over local debts

(People's Daily Online)

14:53, August 16, 2011

China's Ministry of Finance said on Monday that the risks of China's local government debt were "controllable," but the country needs to do more to assuage public concerns.

The majority of the local provincial, city and county-level governments have the ability to repay their debts – estimated at a total of 10.7 trillion yuan at the end of 2010, but some localities are financially weak and therefore risky, the ministry said in a statement.

The latest information from Beijing says that 4.6 trillion yuan, or about 40 percent, is due in 2011 and 2012. Others will extend to as faraway as 2018, so it won't be a big problem of repayment for the local governments.

The Central Government has garnered sufficient ammunitions in store to meet timely payment and prevent a default from crippling bank security and economic growth, experts say.

The options on the table include: Local governments are asked to develop new revenue sources including selling lands and locally-owned properties to meet the arrears; and if necessary, individual provinces could apply to the Ministry of Finance for a sale of local government bonds.

"In some cases, governments rely too heavily on revenue from land sales to pay their debts, while in other areas debt pressure is exceptionally high for highway projects, colleges and hospitals," the Ministry statement said.

But the ministry suggested local governments try to liquidate fixed assets, land and other resources at their disposal to enhance payment.

Local governments, barred from selling local bonds, established 6,576 financing vehicles by the end of 2010 to fund projects such as new roads and airports, according to a report by the National Audit Office.

They had 10.7 trillion yuan, nearly 27 percent of China's gross domestic product, in outstanding liabilities at the end of 2010, of which 8.5 trillion yuan was bank loans.

About a third of loans granted to local government financing vehicles, or some 2.8 trillion yuan, were determined to be low-risk and would be booked as corporate loans.

That designation would allow banks to put aside fewer provisions for these loans, a move that would relieve the pressure on banks to raise fresh capital.

Government officials and analysts warned of default risks because of a lack of liquidity under the central bank's tight monetary stance, and irregularities during operation.

Liu Jiayi, the auditor-general, previously said that "some management of local government financing platforms is irregular, and their profitability and ability to pay their debt is quite weak."

He proposed that the central government allow regional authorities to sell debt.


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