(Recasts, adds quote, writes through)
By Kelvin Soh and Aileen Wang
BEIJING, Nov 8 (Reuters) - 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 Thursday.
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.
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 year.
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 said.
“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 said.
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 policies.
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)