Risk of debt default seen low
By Richard Fu |
August 30, 2011, Tuesday
|
Print Edition
Print Edition
THE likelihood of China defaulting on its government debt is low, the nation's top economic planning agency said yesterday in response to concern about local authorities' ability to repay their borrowings and a jump in bad loans.
The total debts held by China's central government and local governments account for less than half the nation's gross domestic product, "far below" the levels in European nations and the United States, Xu Lin, head of the National Development and Reform Commission's fiscal and financial department, said on its website.
Xu said that although China should learn from the debt problems in Europe and the US and strengthen monitoring over government debts, the situation here was different.
China's local government debts are largely used to fund infrastructure such as roads, subways and airports, which would generate income in the long run and boost local economies, Xu said.
"Of course, this doesn't mean the government could borrow uncontrollably," he said. "The key is to control the scale of the investment and the debt in a reasonable range to prevent systematic repayment risks."
In China, local governments are barred from borrowing directly, including selling bonds and taking bank loans, so they have set up financing vehicles to raise money to beat that rule.
The National Audit Office said in June that 6,576 financing vehicles in China owed 10.72 trillion yuan (US$1.7 trillion) at the end of 2010, or 26.9 percent of China's GDP, and 80 percent of the debt was held by banks.
Though the risks of its local government debt are generally controllable, the Ministry of Finance said earlier this month that certain regions and industries were financially weak and potentially risky.
In some cases, the local governments were relying too heavily on revenue from land sales to pay back their debts, the ministry warned.
Ratings agency Standard & Poor's estimated in April that up to 30 percent of China's lending to local governments could go sour.
The bonds issued by the local government financial vehicles to fund urban construction are a more transparent funding channel, Xu said.
The yields of such bonds have recently risen rapidly along with increased difficulty in selling them, reflecting investors' concerns about local government debt.
The total debts held by China's central government and local governments account for less than half the nation's gross domestic product, "far below" the levels in European nations and the United States, Xu Lin, head of the National Development and Reform Commission's fiscal and financial department, said on its website.
Xu said that although China should learn from the debt problems in Europe and the US and strengthen monitoring over government debts, the situation here was different.
China's local government debts are largely used to fund infrastructure such as roads, subways and airports, which would generate income in the long run and boost local economies, Xu said.
"Of course, this doesn't mean the government could borrow uncontrollably," he said. "The key is to control the scale of the investment and the debt in a reasonable range to prevent systematic repayment risks."
In China, local governments are barred from borrowing directly, including selling bonds and taking bank loans, so they have set up financing vehicles to raise money to beat that rule.
The National Audit Office said in June that 6,576 financing vehicles in China owed 10.72 trillion yuan (US$1.7 trillion) at the end of 2010, or 26.9 percent of China's GDP, and 80 percent of the debt was held by banks.
Though the risks of its local government debt are generally controllable, the Ministry of Finance said earlier this month that certain regions and industries were financially weak and potentially risky.
In some cases, the local governments were relying too heavily on revenue from land sales to pay back their debts, the ministry warned.
Ratings agency Standard & Poor's estimated in April that up to 30 percent of China's lending to local governments could go sour.
The bonds issued by the local government financial vehicles to fund urban construction are a more transparent funding channel, Xu said.
The yields of such bonds have recently risen rapidly along with increased difficulty in selling them, reflecting investors' concerns about local government debt.
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