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China Local Governments Need More Private Capital, JPMorgan Says

China needs to expand the access local governments have to private capital for funding about 19 trillion yuan ($3 trillion) of investment projects they’ve announced since May, JPMorgan Chase & Co. analysts wrote.

Slowing economic growth and central government limits on lending to local authorities and the property sector have created “headwinds” for local governments’ “traditional” funding sources that include fiscal revenue, land sales and bank borrowings, Hong Kong-based analysts Haibin Zhu, Lu Jiang and Grace Ng wrote in a research note dated Oct. 5.

A lack of funding for local government investment projects may extend the economic slowdown in China, where growth moderated in the second quarter to the weakest pace in three years, Song Guoqing, an adviser to the nation’s central bank, said last month. Expansion has slowed as the European debt crisis sap demand for exports and a campaign to rein in home prices eroded domestic consumption.

In 2008, China introduced a 4 trillion yuan stimulus plan to fend against the effects of the global financial crisis. That plan provided loans from state-owned banks for local infrastructure projects, which later spurred concerns some of the debt would go unpaid.

“The crucial ingredient is the source of funding,” the JPMorgan analysts wrote. “The lesson from the 2008-2009 experience is that the government should reduce the role of public funding and allow access of private capital in areas that used to be dominated by the state sector.”

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