BEIJING (Reuters) - China’s local government debt load rose by a mere 300 million yuan ($47.42 million) last year, Premier Wen Jiabao said on Wednesday, downplaying risks from an issue that is a key concern for the health of the world’s second largest economy.
The marginal increase of local government debts in 2011 came after banks were ordered to tighten such lending and local governments were forced to rein in their investment spree.
Wen told reporters at the end of the annual parliament session that China’s local governments borrowed 2.1536 trillion yuan in new debts, but had paid back 2.1533 trillion yuan.
Chinese governments accumulated 10.7 trillion yuan worth of debts by the end of 2010, according to China’s national audit office, and one-quarter of that matured by the end of 2011.
Economists have warned that some 20 to 30 percent of the loans are likely to turn sour, which could cripple China’s banking system and even put a drag on the country’s economic growth.
But Wen said: “The government debt level is under control, and is safe.”
“The debt-to-GDP and budget deficit-to-GDP ratio for China is at a fairly low level. They are both lower than many developed countries and in emerging market economies,” he said.
He did not give a projection of what percentage of the local government debt is likely to go unpaid.
Wen said that many local government debts have resulted in “high-quality assets” with cash flows and returns, and such projects are able to pay back their debts with generated returns.
“We will properly handle outstanding local government debt in a step-by-step manner by classifying it into different categories and managing it accordingly,” he said.
Wen said China will adopt some market-based approaches, such as asset disposal, project transfer and equity deals, to clean up existing local government debts.
Beijing and local governments will shoulder debts incurred for “public good” projects such as schools, Wen said, adding that all debts regarding construction of primary school buildings are fully paid.
“For the future, all local government debts must be included in the fiscal budget and be subject to the people’s congress of the same level,” Wen said.
“In a word, we will take the matter of local government debt very seriously, and we will not allow it to adversely affect China’s development.” ($1 = 6.3270 Chinese yuan)
Reporting by Chris Buckley and Zhou Xin; Editing by Ken Wills and Richard Borsuk