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Beijing (AFP) Aug 19, 2010 China on Thursday attempted to ease concerns about the dangers posed by the heavy debt burden of local government financing vehicles, saying there was no systemic risk. While some debts would turn sour, most of the money owed by local government companies would be repaid, the Ministry of Finance and China Banking Regulatory Commission said in a joint statement. "There are some risks with loans to the financing vehicles, but the overall risk is manageable and will not lead to systemic risk," the statement said. "Most of the loans will be repayable from steady and sufficient cash flow generated by the investment." The statement came after state media said last month that 23 percent of the 7.66 trillion yuan extended to local governments' financing vehicles were in danger of turning sour. Chinese banks lent huge amounts to provincial financing vehicles for construction projects last year after Beijing called for nationwide efforts to spur the economy. Local governments are barred by law from borrowing directly from banks. China has powered out of the global crisis on the back of a stimulus package worth four trillion yuan and the state-backed bank lending, which saw new loans nearly double from the previous year to 9.6 trillion yuan in 2009. The lending spree raised concerns in Beijing over a possible new crop of bad loans that could threaten the world's third-largest economy. The regulator warned in June that "risk management has been inadequate" in the banking sector and there were "growing potential risks" in lending to local government investment units. It urged financial institutions to improve their "risk awareness". The roughly 1.76 trillion yuan reportedly at risk of default would be nearly four times the amount of all non-performing loans in Chinese banks as of the end of June, according to figures released by the bank regulator. Lending to local government financing arms accounts for 18-20 percent of total loans in the banking system, global ratings agency Standard & Poor's said last month. If 30 percent of these loans turn sour, it could add four to six percentage points -- or the equivalent of 400 billion dollars -- to the non-performing loan ratio of the banking system, it said.
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