(Recasts, adds quote, writes through)
By Kelvin Soh and Aileen Wang
BEIJING Nov 8 China's central government is
deeply concerned about loans made to financing vehicles set up
by local governments and will retain tight controls on extending
new credit to them, the country's bank regulator said on
Total outstanding loans to local governments stood at 9.25
trillion yuan ($1.48 trillion) at end-September, Shang Fulin,
chairman of the China Banking Regulatory Commission, told a
forum at a gathering of China's ruling Communist Party.
"The State Council and other central government bodies are
deeply concerned about loans to local government financing
vehicles. We are tightly controlling new loans and will ensure
no new loans to the sector," Shang said.
He added that risks posed by the loans were under control
and that 97.3 percent of all outstanding local government
financing vehicles were backed by cash flows.
Local government debt has been a dark cloud hanging over
China's public finances since it was revealed that local
authorities had racked up 10.7 trillion yuan ($1.7 trillion) of
loans by the end of 2010.
The borrowing binge was triggered by the spending demands in
Beijing's 4 trillion yuan ($640 billion) stimulus programme
launched in 2008 at the depths of the global financial crisis.
Although outside economists have been warning of the risk to
the Chinese banking sector for some time, Chinese officials are
only gradually coming to acknowledge the extent of the problem.
In October, Xiao Gang, chairman of the board of the Bank of
China, warned that the potential risk to the banking
system posed by non-performing loans was greater than the
official numbers suggest.
Real estate lending is another area of concern for investors
worried about the ability of developers to repay or refinance
debt in the face of a government clampdown on the property
sector to curb speculative activity. Prices in many key cities
doubled in little more than 12 months during 2010.
But Shang said there was no real risk of widespread defaults
on loans made in the real estate sector.
SHADOW LENDING RISKS
Fitch Ratings, which has repeatedly warned of the dangers to
China's banking system of shadow lending - much of it to the
real estate sector - estimated on Thursday that broad credit in
China will surpass 1.7 trillion yuan ($272.27 billion) this
Regulators have tried to sort out exactly what is owed by
local governments and consolidate sometimes overlapping
financing vehicles, many of which were used to fund real estate
and local infrastructure projects.
Local governments for their part complain that most tax
revenues flow to the centre, leaving them reliant on the
property market and loans to fund growth.
At current growth rates, China's banking sector assets will
have expanded by $14 trillion from 2008 to 2013. The amount is
equivalent to the entire U.S. commercial banking sector, Fitch
"Rising leverage either will swamp borrowers' ability to
repay, or banks' funding and capital needs will fall short of
existing resources," Fitch's China banking analyst Charlene Chu
The Chinese Communist party's once-in-five-years congress
has been convened to anoint a new generation of leaders, but is
also an opportunity for senior officials to hash out or defend
For more news from the Congress, please click
($1 = 6.2437 Chinese yuan)
(Writing by Lucy Hornby and Nick Edwards; Editing by Nick
Macfie & Kim Coghill)