News24

China government debt 'controllable'

2012-01-30 12:47

Beijing - Chinese Premier Wen Jiabao said government debt was "overall safe and controllable" and key projects would continue to receive funding to avoid "systemic risks", state media said on Monday.

An explosion in lending in recent years has fuelled concerns that local governments, which borrowed heavily to build roads, bridges and luxury apartment buildings, will default as the world's second largest economy slows.

China's audit office said earlier this month that it had uncovered $84bn in misused funds involving local government debts.

That compares with an estimated $1.7 trillion in local government debt at the end of 2010 - or about one quarter of China's 2010 gross domestic product - but analysts believe the real figure could be much higher.

"Currently our government debt is overall safe and controllable," Wen told a government financial work conference earlier this month, according to the People's Daily, the mouthpiece of the ruling Communist Party.

"We are taking the issue of managing local government debt very seriously. Through clean-ups and regulation, the trend of expanding investment vehicles has been effectively contained."

Destabilising an economic giant

Local governments, which are not allowed to borrow directly from banks, have set up thousands of investment vehicles to finance infrastructure and other projects.

But there are concerns that Beijing's efforts to contain inflation and property prices by restricting lending and hiking interest rates could trigger widespread defaults and destabilise the economic giant.

Policymakers have started to ease lending restrictions but have indicated they will move slowly to open the credit valves to avoid reigniting inflation, which hit a more than three year high of 6.5% last July.

"We need to actively solve the financial risks but also ensure financing for major projects under construction," said Wen.

"We shouldn't simply slam on the brakes."