Central bank says China's debt 'controllable'

July 12, 2011 - 8:29 AM

BEIJING (AP) — China's central bank says risks associated with debts run up by local governments are controllable, in the latest effort to allay fears state-owned banks might face a wave of loan defaults.

The national auditor reported last month that local governments ran up 10.7 trillion yuan ($1.6 trillion) in debt — equivalent to one-quarter of China's annual economic output — over the past decade as they borrowed to pay for public works construction and other expenses.

"Regarding the risks of loans to local government finance platforms, we believe that overall they are controllable," said a People's Bank of China statement late Monday.

Many local Chinese governments created investment agencies over the past decade to build highways, airports and other projects, financed by borrowing from state banks. Analysts say some of those projects are not earning enough to repay their debts, while some government borrowing went to pay for social programs.

The central bank statement said many local government investments were financially viable and would generate returns to repay their debts. It gave no new details on a possible default rate or steps Beijing might take.

Private sector analysts say a banking crisis is unlikely because China's state-owned banking industry and central government have vast financial resources to cover possible bad loans if necessary.

Last month's audit report said some governments were not able to pay their debts but gave no indication how many might default. Analysts have estimated possible bad loans at up to 30 percent of the total.

The central bank statement also rejected outside estimates that put a higher total on local government debt.

The rating agency Moody's says it has identified possible additional debt of up to 3.5 trillion yuan ($540 billion) that was not included in the audit report.

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People's Bank of China (in Chinese): www.pbc.gov.cn