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China Says Local Governments Clear Up Some Debt Irregularities

China’s audit office said local governments have cleared up almost half the 531 billion yuan ($84 billion) of debt on their books that an investigation found to have irregularities.

Local governments and the companies they set up to borrow money have so far resolved 259 billion yuan of their bad debt with measures including land sales and the offer of new collateral, according to data released yesterday on the National Audit Office’s website.

Premier Wen Jiabao pledged last year to clean up surging debt by local governments after an audit office investigation found they had amassed 10.7 trillion yuan of debt by the end of 2010. Shares of Chinese banks have slumped on concern some of the debt will sour as economic growth slows, leaving them saddled with bad loans.

Local governments have taken responsibility for repaying debts, set up reserve funds, improved the stock of debt, and “actively corrected violations” the audit office said.

Barred since 1994 from issuing bonds and directly obtaining bank loans, local authorities formed more than 6,500 financing vehicles to fund the construction of roads, sewage plants and subways, according to audit office figures. The central government allowed Shanghai, Shenzhen, Zhejiang and Guangdong last year to issue bonds independently in a trial program to help them access cheaper funding.

The audit office’s report yesterday said its investigation found instances of funds being obtained improperly or diverted to the capital and property markets.

Unauthorized Collateral

A total of 35.1 billion yuan was invested in the capital markets, real estate, or in energy intensive projects, it said. Of that figure, 14 billion yuan has been rectified through measures including the use of local governments’ own money, it said.

In addition, 23 billion yuan out of 73.2 billion yuan of debt obtained by the local governments’ financing vehicles through the unauthorized use of assets as collateral has been cleared up by means including increased land sales and the provision of other collateral, the office said.

Five commercial banks were found to have been involved in lending to “irregular” projects and the misappropriation of loans totaling 58 billion yuan, the audit office said, without identifying the lenders.

Seven provincial governments have drawn up or improved rules to manage the debts of financing vehicles, the report said, without specifying which authorities.

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