China’s Lou Says Risk of Local Debt Default Not Great

(Corrects currency conversion in fourth paragraph.)

Chinese Finance Minister Lou Jiwei called the scale of the nation’s local government debt controllable and said the risk of default was “not great.”

Lou, in an interview aired today by state broadcaster China Central Television, said the growth of borrowings by local authorities was slowing. Some local governments do face “relatively big” debt problems, especially those that previously saw very rapid revenue growth, he said.

“They thought they would have money forever, so they dared to borrow,” said Lou, who was named finance minister in March. “For a period of time, their fiscal revenue grew 50 percent. They thought the growth would be 50 percent for the next five years, so they spent the money first.”

China in July ordered a nationwide audit of local government debt, which the National Audit Office said in a 2011 report totaled 10.7 trillion yuan ($1.75 trillion). Former Finance Minister Xiang Huaicheng said in April the amount may be twice as much at more than 20 trillion yuan. The lack of transparency in local government borrowings prompted Fitch Ratings Ltd. to cut China’s long-term local-currency debt rating that same month.

Local Chinese governments have set up thousands of companies to sidestep regulations that bar them from directly taking bank loans or selling debt. These financing vehicles were used to raise funding for the construction of roads, sewage systems and other infrastructure.

Lou also said in the CCTV interview that China may introduce some deductions for individual income taxes, such as for dependent family members and mortgage payments. He also said that China can meet its fiscal revenue goals for 2013.

To contact Bloomberg News staff for this story: John Liu in Beijing at jliu42@bloomberg.net

To contact the editor responsible for this story: John Liu at jliu42@bloomberg.net

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