Local debts controllable amid tightening regulations

Updated: 2011-09-12 10:52


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BEIJING - Senior Chinese officials from the nation's central government departments said that debt risks facing local governments are controllable as regulations are increasingly tightening to prevent such risks.

According to the country's top auditing authority, the debts of local governments stood at a little more than 10.7 trillion yuan ($1.67 billion) at the end of last year.

Audit results also showed that local governments' foreign debt ratio stood at 70.47 percent, lower than the 100 percent warning line. The ratio, based on external debt and export income, is a major measure of foreign debt risks.

Meanwhile, the debt-to-GDP (Gross Domestic Product) ratio covering both the central and local governments was less than 50 percent, which was far lower than that of the world's major economies currently mired in debt crises, said Xu Lin, the director of the fiscal and finance department of the National Development and Reform Commission (NDRC), the country's top economic planning body.

According to the nation's statistics bureau, China's GDP rose 9.6 percent year-on-year to reach 20.446 trillion yuan ($3.2 trillion) in the first half of this year, while fiscal revenue surged 30.5 percent from a year earlier to 6.67 trillion yuan in the first seven months.

Xu also said that the likelihood of debt defaults by local governments was low.

His remarks were validated by tighter regulations, or at least the central government's awareness of a need to act in order to prevent debt from getting out of hand.

In June, officials made proposals to the Standing Committee of the National People's Congress, the country's top legislative body, that relevant laws and regulations be clarified regarding the management of the local government financing vehicles (LGFV) and the establishment of a mechanism for risk-warning and debt repayment.

The Chinese Academy of Social Sciences and the Ministry of Finance in July jointly released a report which pointed out that the debts of local governments are a long-term threat considering the hidden debts of the economies of China and other developing countries are large.

The report also warned of spreading sovereign debt crises which have become serious problems for Europe, the United States, and Japan.

The alert caught the attention of Premier Wen Jiabao, who chaired a meeting in July and ordered local governments to come up with measures to contain debt risks.

"Actually, since last year, only the top 100 counties in terms of fiscal revenue can apply for issuing bonds through LGFVs," Xu said.

Meanwhile, a local government is not allowed to sell such bonds if its debt exceeds 100 percent of its total fiscal revenues, said Xu.

"These strict regulations rendered many LGFVs unable to issue bonds, and this will help reduce risks," Xu said.

An official with the Ministry of Finance said the ministry will speed up studies on plans to set up a risk warning system for local government debt and include local government debt in budget management.

The country's banking regulator also said it will order banks to strictly control new lending, step up control over land-mortgage loans, and carry out cooperations with local governments in a "prudent" manner.