China said on Monday the default risk of its local government debt is “controllable overall,” while it urged strict checks over new debts that are potentially unsafe.
Local governments as a whole have the ability to repay their debts, but some districts and industries are financially weak and potentially risky, the Ministry of Finance said in a statement on its website.
The evaluation came after the disclosure of massive local government debts aroused concerns over the sustainability of China’s impressive economic growth.
Local government debt totalled 10.72 trillion yuan ($1.66 trillion) at the end of 2010, the National Audit Office announced in June.
That amount equaled about 26.9 percent of China’s gross domestic product (GDP) in 2010, deputy Finance minister Li Yong was quoted in Monday’s People’s Daily.
The ministry acknowledged some particular local governments have relatively high debt compared with their financial capabilities.
In some cases, governments rely too heavily on revenue from land sales to pay their debts, while in other areas debt pressure is exceptionally high for highway projects, colleges and hospitals, according to the ministry’s statement.
Effective measures must be taken to properly handle the existing debt in risky areas, and industries and new debt must be strictly controlled, it said.
Local governments are only allowed to issue a limited amount of bonds, making financing vehicles a significant tool of fund-raising as authorities crave capital to build roads, bridges and other infrastructure projects.
The huge amount of debt was accumulated over a long period during which the default rate has been relatively low, the ministry said Monday.
It said local governments can improve their repayment abilities with increasing revenue from the country’s rapid economic expansion.
The liquidation of fixed assets, land and other resources owned by local governments can also help pay back their debts, according to the ministry’s statement.
Taking into account local government debt, treasury bonds and bonds issued by policy-based financial institutions, China’s public sector has an overall debt-GDP ratio of around 50 percent, below the 60-percent alert line, said deputy Finance minister Li Yong.
He said efforts to put local governments’ financing vehicles in order have made “positive effects.”
The ministry on Monday pledged to divest some financing vehicles of their fund-raising businesses and commercialise others by drawing private investment.
It ordered local governments not to guarantee the debts of other institutions or enterprises, and said a debt-financing system should be developed for local governments.