China Vice Finance Minister Urges ‘High Alert’ on Local Debt

A Chinese vice finance minister warned the nation must be on “high alert” to the dangers of rising debt in companies set up by local governments to fund investment projects.

“Prominent risks are not only in the shadow-banking area but also in local government financing vehicles, and we do need to be on high alert,” Zhu Guangyao said at a briefing in Beijing today. At the same time, companies are mainly investing in infrastructure projects with relatively good operations and repayment abilities, he said.

The central government may be forced to bail out some local authorities and take over their liabilities, Moody’s Investors Service said last month, after a new audit report showed a jump in borrowings. The ratings company lowered its outlook for China’s sovereign credit rating to stable from positive in April and Fitch Ratings Ltd. cut the country’s long-term local-currency debt rating, with both citing risks from local-government debt and credit expansion.

“The most significant medium- and long-term threat to China’s fiscal position lies in the system of implicit guarantees that the central government has established for local government debt,” Zhang Monan, a researcher at the State Information Center, wrote in a commentary posted yesterday on the Project Syndicate website. “When a local government is no longer able to service its debt, the central government will have to place its own fiscal capacity at risk by assuming responsibility.”

Higher Debt

Local government investment vehicles raised 636.8 billion yuan in urban-investment bonds last year, about 150 percent more than in 2011, Zhang said.

Zhu said today the total amount of debt owed by such companies was probably higher now than the end-2010 figure of 10.7 trillion yuan ($1.75 trillion) given by the National Audit Office in its first report on local government debt released in June 2011. The agency issued a report last month that showed the debts of 36 authorities chosen for scrutiny had risen 13 percent to 3.85 trillion yuan in the two years through Dec. 31, 2012.

Last month, banking regulator Shang Fulin said the nation’s banks had 9.59 trillion yuan of outstanding loans to local government financing vehicles at the end of March. Most local debt is guaranteed with assets and the “overall risk is controllable,” he said.

In its report last month, Moody’s estimated that total local government direct and guaranteed debt may have risen 13 percent to 12.1 trillion yuan by end-2012 from end-2010, based on data in the National Audit Office’s June review.

Trial Program

The Finance Ministry said yesterday it will expand a trial program first started in 2011 that allows local governments to sell bonds directly. The eastern provinces of Shandong and Jiangsu will be included, joining Zhejiang and Guangdong provinces plus the cities of Shanghai and Shenzhen.

The ministry also announced two auctions this month for commercial banks to bid on 100 billion yuan of fiscal deposits via the People’s Bank of China, a move that may help ease liquidity shortages after a cash crunch last month sent interbank lending rates to at least a decade high.

Fiscal policy must act with monetary policy to maintain market stability, especially when needed to address liquidity shortages, Zhu said today. “The Ministry of Finance has moved in this regard by auctioning fiscal funds to banks as deposits.”

Liquidity in the financial system is “sufficient,” Zhu said, citing above-target growth in M2, China’s broadest measure of money supply. M2 has grown more than 15 percent every month this year, against a government goal for 2013 of 13 percent.

At the same time, some individual financial institutions experienced cash shortages “because they had some problems in their management that needed attention,’ Zhu said. “The central bank, in line with the principal of prudent regulation, has to give a warning, and that’s necessary,” Zhu said.

“The central bank of any country, as the last lender, has the duty and responsibility to maintain financial market stability,” Zhu said.

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