Economy

Tackle local debt units, China tells banks, officials

(Agencies)
Updated: 2010-06-13 16:25
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BEIJING - Chinese officials and banks must clean up their financing of local government-backed investment units under rules unveiled on Sunday, marking Beijing's latest effort to tackle the mounting debt worries of these units.

The State Council, or cabinet, issued a directive warning that some of these quasi-independent financing vehicles, often used by local governments to fund infrastructure projects, were dangerously loaded with debt built up using implicit assurances to banks from local officials.

Chinese provinces, cities and towns have used the investment subsidiaries to circumvent restrictions on their own borrowing, and many of these units borrowed heavily in 2009 to fund an infrastructure spending spree.

The State Council said these investment platforms "have experienced some problems that demand urgent attention", according to the central government's website (www.gov.cn). The cabinet directive was dated Thursday.

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"The main ones are that the scale of debt-driven financing of these investment vehicle companies has inflated rapidly, their operation is not sufficiently regulated; local governments have violated regulations and provided implicit (loan) guarantees and the risks from debt obligations have been constantly growing," said the directive.

It also said some banks have shown "weak grasp of risks" and failed to police loans to these local investment units properly.

According to the China Banking Regulatory Commission, outstanding loans to local government financing vehicles were 7.4 trillion yuan ($1,084 billion) at the end of last year, a fifth of the country's total stock of loans.

Some economists have called these debts a growing risk to Chinese public finances, with questions raised about the future returns on many of the projects launched as part of the stimulus programme to counter the financial crisis.

The State Council directive ordered banks to "strictly regulate credit management" for the investment vehicles, and it told local officials to avoid using government revenues, state-owned assets and other "direct or indirect" collateral for loans to these companies.

"The credit risks of investment vehicle companies must be internalised," said the directive.