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China Local-Government Debt Risk Needs ‘Attention,’ PBOC Says

June 02, 2011

Bloomberg News

June 2 (Bloomberg) -- China’s central bank urged “paying attention” to the credit risks of local-government financing vehicles because their debts have long maturities and are difficult to oversee.

Some companies set up by provincial and municipal governments to fund infrastructure projects are unsustainable, the People’s Bank of China said in a report on its website late yesterday. The loans are “generally large, with long maturities, and it is difficult to oversee their use,” the central bank said.

China is increasing scrutiny of local-government borrowing to fund the construction of roads, airports and other infrastructure because of the risk of banks being saddled with bad loans. Local governments, barred from selling bonds or borrowing directly from banks, had set up more than 10,000 financing vehicles by the end of 2010 to raise money, mostly for infrastructure, the central bank said.

News website reported yesterday that China will conduct an investigation into local-government debt, citing Wu Xiaoling, vice chairman of the finance and economy committee of the National People’s Congress. Reuters reported earlier on a plan to clean up local-government debt, citing unidentified people.

China should explore how local governments can strengthen their debt management through market-oriented financing, the People’s Bank of China said. Authorities should study the possibility of them selling bonds to alter financing now dominated by bank loans to investment vehicles, it said.

The report gave some details on the scale of lending to the financing entities. In no region did lending to the vehicles account for more than 30 percent of total bank loans at the end of last year, the report said.

Slower Loan Growth

Lending to the financing vehicles of some provinces and municipalities that report directly to the central government rose less than 20 percent last year after gaining more than 50 percent in 2009, according to the report, which didn’t give more specific data.

More loans are being backed by collateral instead of the fiscal revenue of provincial and municipal authorities, the central bank said. Financing vehicles for the municipality of Chongqing have collateral backing 60 percent of loans, according to the report.

The number of local-government financing companies has risen more than 25 percent since 2008, according to the report.

--With assistance from Victoria Ruan and Bloomberg News in Beijing. Editors: Bloomberg News, Paul Panckhurst

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To contact the editor responsible for this story: Shelley Smith at

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