March 4, 2010 / 9:28 AM / 10 years ago

China must shed light on local government debt

BEIJING (Reuters) - China needs clearer rules to govern borrowing by local governments and to bring their debt holdings into the transparent light of day, a senior government economist said on Thursday.

But Jia Kang, a research director in the Ministry of Finance, said that worries about local debt were overblown and systemic implications limited, because default rates were likely to be low.

Some economists have pointed to debt incurred by local governments as a growing risk to Chinese public finances. Provinces, cities and towns have circumvented restrictions on their own borrowing by obtaining financing through investment subsidiaries, making it difficult to gauge the full extent of local government debt.

“To bring local debt into the sunshine means increasing transparency and sharing more information. This will help the government to supervise and control risks,” he told Reuters in an interview on the sidelines of the annual Chinese People’s Political Consultative Conference.

“To legalize means that there should be a complete procedure, which is based on laws, stipulating in which form and what amounts investment vehicles can issue debt,” he said.

Jia, whose estimates are widely cited in Chinese financial circles, said that local government’s investment arms had wracked up debt amounting to more than 6 trillion yuan ($880 billion).

The 21st Century Business Herald reported earlier that local governments have taken on more than 8 trillion yuan in debt in all, including 7 trillion yuan in bank loans, according to unnamed regulatory agencies.

Earlier on Thursday, a Chinese banking regulator said the finance ministry was drafting new rules to control fund-raising by local governments’ special purpose vehicles.

“The government urgently needs to legalize the entire procedure for local government financing,” Jia said.

“I know that government bodies are speeding up their development of regulations to better supervise and control fund-raising by local government vehicles,” he added.

He said that non-performing loans on banks’ books would undoubtedly increase in the coming years, but said risks were manageable as it would largely be lower levels of governments, such as towns and counties, that struggled to service their debts.

($1=6.826 Yuan)

Editing by Jacqueline Wong

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