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Debt alert for local authorities

By Zheng Yangpeng (China Daily)

09:14, February 05, 2013

Reliance on infrastructure may lead to overexposure, experts say

Plans announced by local governments to invest heavily in fixed assets this year have ignited a chorus of debt warnings from experts.

A total of 19 provincial-level regions, out of 31 on the mainland, have set fixed-asset investment growth targets above 20 percent. Most of them are in central and western regions.

In 2012, fixed-asset investment, or money spent on infrastructure, factories and public facilities, far exceeded 20 percent over the year in 11 provincial-level regions.

The national average was 20.6 percent.

Experts said overspending on fixed assets may lead to mounting local debt and risk lenders being overexposed.

"In other countries, debt-fueled investment has historically led to a banking or foreign exchange crisis,'' said Tom Byrne, senior vice-president of Moody's credit office for Asia and Middle East.

"The latter is not a concern for China because investment is predominantly financed by domestic savings. But the former could be, even though the banking system is currently stable.

"Most East Asian economies are highly sensitive to changes in the rate of investment in China — South Korea in particular,'' Byrne said.

"In addition, commodity exporters such as Chile, Saudi Arabia and Australia are also fairly dependent on investment in China."

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