By Terence Poon
9 March 2010
BEIJING — Signs mounted Monday of Chinese authorities’ concern about the risk from debt incurred by local governments in projects to help China’s economy recover — an issue that is a hot topic at the National People’s Congress, now meeting in Beijing.
China’s leaders have increased scrutiny of this debt over the past months, fearing that local governments won’t be able to pay back all their loans. The issue was also highlighted in the Ministry of Finance’s budget report released at the start of the annual legislative session on Friday. The added spotlight on officials at the meeting has prompted regulators from several agencies to discuss the issue publicly.
The China banking regulator’s Shanghai branch said Monday that it is requiring banks in the city to reassess loans extended to local governments. An official who heads a municipal government’s investment arm says local governments were instructed late last year by the Ministry of Finance to stop offering loan guarantees for their investment arms.
Su Ning, a vice governor of the central bank, also addressed the riskiness of such loans Monday, saying some of the investment vehicles borrowed for infrastructure projects that won’t necessarily generate earnings, making loan repayment difficult.
The comments added to indications by Minister of Finance Xie Xuren and central bank Gov. Zhou Xiaochuan over the weekend that the central government plans to curb investment growth and make banks pay for taking on risks, in order to avoid moral hazard and reform the system to give local governments more financing options.
Local governments in China aren’t allowed to run deficits, issue debt or make guarantees. However, banks have chosen or been pressured to ignore this law in recent years, said Stephen Green, head of research at Standard Chartered Bank (China) Ltd.
Many local governments have set up special investment vehicles that borrowed from banks to fund infrastructure projects, capitalizing these vehicles with local governments’ land assets and providing guarantees for them.
These projects have helped China rebound from the global financial crisis, but have also raised concerns within the government about risk; such loans don’t appear on the government’s books, but may hurt banks and public finances if they turn bad.