Wen calls for guard against local government debt risk

China's Premier Wen Jiabao urged the country on Saturday to reduce risks stemming from local government debt and called for better regulation to manage the risks, although he described the debt situation as "still under control".
In a speech at the end of an important financial conference, Wen said China must "regulate its local government debt financial mechanism ... and establish controls for the scale of local government debt and a risk warning mechanism", according to comments published on a government website.
"Prevent and resolve local government debt risks," Wen said. "Currently, our country's government debt is generally secure and under control." Wen stopped short of providing a detailed plan on how to manage debt risks at the two-day National Financial Work Conference, held every five years.
The conference, first held in 1997, comes at a time of growing worry about irregularities with local government debt which has left investors wondering how much work remains to be done to clean up after 2008's stimulus-fuelled credit binge. "China's financial sector still has some outstanding issues and potential risk" in terms of the "operation of its financial institutions, corporate governance and risk management", Wen said.
China's state audit office said on Wednesday it uncovered 530 billion yuan ($84 billion) worth of irregularities involving local government debt. But the figure is a fraction of the 2 trillion-3 trillion of sour loans economists believe are buried in the 10.7 trillion yuan of debt local governments had by the end of 2010.
The scale of debt worries investors because it could rock the banking system. Wen also said that China must "strengthen and improve its financial supervision and effectively prevent systemic financial risks". "The banking industry should establish a comprehensive and prudent risk supervision system," he said. "The securities industry should improve market regulations, strengthen behaviour supervision and protect investors legitimate rights."
The conference is widely seen setting the tone for financial reform and it formulates multi-year plans for the financial system. Wen pledged to deepen the reform of financial institutions, by "breaking monopolies, broadening access and encouraging ... private capital into the financial services sector".