HIGHLIGHTS-China's own account of local government debts

BEIJING, June 27 Mon Jun 27, 2011 2:41am EDT

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BEIJING, June 27 (Reuters) - China released a comprehensive assessment of the debts of its local governments on Monday and barred those entities from borrowing any further, taking its first major step to reduce the risk of default and instability in the world's second-largest economy.

Releasing its first audit of local government debt, which amounts to 27 percent of the economy, China's chief state auditor Liu Jiayi said efforts would be made to clean up and regulate local government financing vehicles and the approach would be based on the type of debt.

Below are some details of the audit:

SIZE AND STRUCTURE OF CHINA LOCAL GOVERNMENT DEBT*

-- Chinese provincial, municipal and county-level governments accumulated 10.7 trillion yuan debts as the end of 2010.

-- Of the total, 6.7 trillion yuan, or 62.6 percent, were government liabilities; 2.3 trillion yuan were in the form of government credit guarantees. The remaining 1.7 trillion yuan were contingent liabilities.

-- Of the 10.7 trillion yuan, 51.2 percent, or 5.48 trillion yuan, were incurred before 2008; when the government unveiled a massive stimulus programme to counter the impact from the global financial crisis.

-- By the end of 2010, the average debt-to-assets ratio for local Chinese governments was 70.45 percent. Of them, 78 cities and 99 counties have debt ratios of above 100 percent.

-- Among the borrowed money, local governments have invested 6.97 trillion yuan into transport and municipal infrastructure projects by the end of 2010;

-- China local governments have used land as collateral for 2.5 trillion yuan, or 23 percent, of their debts by the end of 2010.

FINANCING VEHICLES

-- By the end of 2010, China had a total of 6,576 financing vehicles, these vehicles hold 4.97 trillion yuan of debts for governments, or about 46.38 percent of total government debts;

-- Among the vehicles, 358 were found to be taking new loans to repay old debt; 148 were found to have a default ratio of 16.4 percent; and 1,033 vehicles were found to have unpaid registered capital of 244.15 billion yuan.

-- Among local governments, three provinces, 29 municipal cities and 44 counties have more than 10 vehicles each.

CLEAN-UP

-- China will "clean up and regulate" local government financing vehicles in principal of "who borrowed, who should be responsible" and take different approaches to tackle different government debts in a "proactive and steady" manner.

-- For projects engaged in competitive sectors with operating profits, government liabilities will be stripped off, and the debts should be paid by project earnings, with government subsidies when necessary.

-- For government liabilities incurred at projects without enough operating profits, debt repayment will be made by government fiscal revenues.

-- Provincial-level government will be allowed to issue bonds. But their debt plans have to go through the State Council before proceeding.

-- Local governments are not allowed to accumulate new debts via financing vehicles, and government credit guarantees will be firmly prohibited.

* Note: The national audit report cover only governmental liabilities; and not all debts of local government vehicles are covered in the report. (Reporting by Zhou Xin and Langi Chiang; Editing by Ramya Venugopal)

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