China says local government debt 'controllable'

SHANGHAI: China's central bank said the risks from local government borrowing were "controllable", despite growing concerns over the potential for an explosion in bad loans.

China's National Audit Office recently put the debt held by authorities at 10.7 trillion yuan as of the end of 2010, or about 27 percent of China's 2010 gross domestic product.

But ratings agency Moody's said last week it had uncovered as much as 3.5 trillion yuan in additional debt after checking the NAO's figures against reports by banking regulators.

Moody's also said the ratio of bad loans could be as high as 8-12 percent, compared to its own previous calculations of 5-8 percent.

However, in a statement late Monday the People's Bank of China said: "Someone has estimated the debts of local government financing vehicles totalled 14 trillion yuan ($2.16 trillion), but the methodology and conclusion of the estimates are both wrong." It did not mention the institution.

"Regarding the risks in the debts of local government financing vehicles, we believe they are generally controllable."

It said only a "small portion" of projects funded by local governments are unable to generate sufficient cash flow to serve the interests and principal payments while the rest are working well.

Chinese banks opened the credit valves in recent years to provincial financing vehicles -- intermediary agencies through which authorities take out borrowings because they are officially banned from assuming debt directly.

New bank lending hit 7.95 trillion yuan in 2010 after nearly doubling to 9.6 trillion yuan in 2009 as banks heeded government calls to spur economic growth following the global financial crisis.

Copyright AFP (Agence France-Presse), 2011