* Premier Wen says nation’s govt debt at controllable level
* Vows economic management won’t cause risks to financial system
* Comments from speech to financial work conference
By Aileen Wang and Chris Buckley
BEIJING, Jan 30 (Reuters) - China’s Premier Wen Jiabao said the nation’s government debt is at an “overall safe and controllable” level, that funding for key projects would be ensured and that applying the brakes to the problem would be done in a way to avoid systemic risks.
Investors have been worried by the scale of the debts built up by China’s local governments, which some fear could threaten the stability of the banking system.
Wen’s comments, reported in the official People’s Daily on Monday, were made in a speech dating back to early January at the government’s flagship financial work conference.
Wen pledged to contain and defuse local government debt risks and avoid the spread of financial risks.
“Currently, our government debt is overall safe and controllable,” he said.
“We are taking the issue of managing local government debt very seriously. Through clean-ups and regulation, the trend of expanding investment vehicles has been effectively contained.”
China’s state audit office said earlier this month it had uncovered 530 billion yuan ($84 billion) worth of irregularities involving local government debt.
But the figure is a fraction of the 2 trillion-3 trillion yuan of sour loans economists believe are buried in the 10.7 trillion yuan of debt local governments had at the end of 2010.
Wen said China “must both actively and appropriately ease financial and fiscal risks, and also ensure the funding needs of key construction projects approved by the government”.
But he warned against a simplistic approach to local government investment.
“We cannot simplistically hit the brakes and use a one-size-fits-all approach, and must avoid turning localised risks into comprehensive, systemic risks,” he said.
Wen also urged greater attention and controls on systemically important financial institutions.
“We must study standards for determination and a framework for assessing our country’s systemically important financial institutions, and we must adopt more stringent oversight standards towards these institutions, enhancing external constraints on them,” he said.
Wen also vowed to “break monopolies” against private capital participation in the financial sector, promising broad reforms to ownership and capital structures in banking, equities, insurance and other financial institutions that would encourage more private capital to flow into the financial services sector.
“Improving financial services for small businesses requires the reform, innovation and regulated development of financial institutions that come in different types and different sizes,” he said, making clear there was a role for private credit in the economy, providing it was properly regulated.
In addition, Wen made the case for more market-based reforms to interest rates and credit pricing to enhance their roles, along with exchange rates, as price levers.
Wen said China should “accelerate nurturing of a market system for benchmark interest rates, guide financial institutions towards enhancing their risk price-setting capacities, and steadily advance marketising reform of interest rates”.
And he repeated the long-standing commitment to “further improve the renminbi exchange rate formation mechanism, strengthen the flexibility of the renminbi exchange rate in both directions, maintaining a basically stable renminbi exchange rate at a reasonable and balanced level”.
China would push forward with yuan convertability in an orderly manner and broaden the use of the currency in cross-boarder trade settlement, he added.
And Wen reiterated that the government would further diversify its huge $3.18 trillion foreign exchange reserves.
“We should explore a multi-layer investment channel for our foreign exchange reserves and further improve the skill of managing the reserve assets by steadily diversifying the investment to maintain safety, liquidity and preserve and increase its value,” he said.
The Premier said China’s financial institutions must step up support for key areas of economic structural adjustment, for projects aimed at saving energy and reducing pollution, and for indigenous innovation.
Beijing has unveiled a slew of tax breaks to help cash-strapped small firms cope with rising costs and has also allowed them to issue more bonds and tap other sources of financing to ease the funding squeeze.
China’s big four state-backed lenders are criticised by small and medium-sized business owners for directing the bulk of their lending capacity to major state-owned enterprises.
Bank lending in China is essentially rationed by the government, which sets an annual lending target and decides how much credit can be created in the economy.
China has set a target of 8 trillion yuan ($1.27 trillion) in new local-currency bank loans and 14 percent growth in broad M2 money supply for 2012, three sources familiar with government plans told Reuters earlier this month.
That marks a rise from 7.47 trillion yuan in new bank loans and annual M2 growth of 13.6 percent achieved in 2011, implying a further loosening of policy by the People’s Bank of China to support the economy as growth loses steam and inflation cools.