Experts: Over-concern about local gov't debt unnecessary

15:01, June 28, 2010      

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The high level of debt found in local governments is no cause for over-concern, according to some industry insiders.

At the Lujiazui Forum 2010 held in Shanghai government audit departments disclosed that the combined outstanding debts for the 18 provincial-level, 16 municipal-level and 36 county-level surveyed governments amounted to 2.8 trillion yuan at the end of 2009, including 1.8 trillion yuan in debt accumulated prior to 2009 and more than 1 trillion yuan in debt in 2009.

Industry insiders believe people should not worry too much about the high debt levels of local governments but rather draw sufficient attention to potential financial risks relating to the debts and focus on the rectification and standardization of corporate financing and loan guarantee practices of local governments.

Liu Jiayi, director of the National Audit Office, said in terms of the proportion of outstanding debts at the year’s end to the financial capacity of the same year, debt risks are relatively higher for provincial and municipal-level governments and governments in western China. Furthermore, the local governments lack the financial capacity to repay their debts.

Lian Ping, chief economist with Bank of Communications, said there are three reasons behind the risks for the high debt levels of local governments. First, projects funded by local financing platforms mostly enjoy implicit guarantees from local governments, which directly lead to the trend that banks' non-performing loans will become hidden over the long term.

Second, local governments often use financing platforms to gain loans from several banks, which make it difficult for banks to secure the actual information on local governments' debt and loan guarantee situations. Third, if domestic credit policy tightens in the future and the economy enters a new correction period, the declining financial capacity and mounting expenditures of local governments will likely create systematic risks involving credit funds.

He also believes that as the term of loans involving governmental financing platforms are relatively long – generally above three years and within 10 years – the problems relating to the loans will not be exposed intensively until the loan repayment period comes in three to five years.

The deputy director of the NPC Finance and Economics Committee Wu Xiaoling, who participated in the Lujiazui Forum, said we need not be too concerned with the current high debt rate of some local governments.

Wu added that the overly-high debt rate for some local governments in 2009 is related to pressure to match funds among last year's "4 trillion yuan" stimulus package.

"The high debt rates of the local governments are mainly concentrated in the economically underdeveloped regions. The relatively large transfer payments of the central government can gradually help solve the problem," Wu added.

Sinolink Securities recently published a research report and said that the high debt rates for local governments and the systematic risk of local financing platforms all depend on whether the newly increased loan scale can be controlled, whether the economy will drop drastically and whether the land market will stagnate. Judging from the current situation, the debt rate of local governments is nothing to be concerned with yet.

Lian said that in order to establish and perfect the local governments' financing constraint system, first the amount of financing must be limited to strictly control over-financing. Second, the local governments' financing-authorization systems, including the financing amount and period of authorization, must be established to restrict and regulate their behaviors. Third, the local governments' investment and financial liability system should also be established to further improve the local government's performance-evaluation system.

Wu said that when the country launches a similar "4 trillion yuan" stimulus plan in the future, it should put forward matching funds requirements based on the local conditions or not require local matching funds at all.

"The NPC hopes to improve the investment management and matching funds requirements," Wu added.

By People's Daily Online


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