China Minister Says Risk of Local Debt Default ‘Not Great’

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.

‘Dead End’

Lou said China will enhance its supervision of how local governments use money raised through bond sales. The funds shouldn’t be used for day-to-day expenses because doing so would be a “dead end,” he said.

Local governments that borrowed money for projects that are now generating good cash flow should use that income to pay debt, Lou said. China may use fiscal funds to pay back some local government debt accumulated to provide “public goods,” he said in the CCTV interview.

Lou also said 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.