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China orders review of local government finances

China orders review of local government finances

China's Cabinet ordered a review Thursday of investment agencies run by local governments amid warnings that Chinese banks might face problems if they cannot repay multibillion-dollar borrowing.
The order was the highest-profile expression of government concern following warnings by the World Bank and others about heavy debt at such agencies, which invested in real estate and infrastructure as part of Beijing's stimulus.
"We must strengthen management of local financing platform companies in order to maintain economically sustainable healthy development and social stability," said a Cabinet statement issued after a meeting led by Premier Wen Jiabao.
Local authorities must "deal with the issue of debt repayment and financing for projects that already are under construction," the statement said. It gave no details of the size of debts or possible losses.
Chinese banks are seen as the world's healthiest after avoiding the mortgage-related turmoil that battered Western institutions. But analysts warn the stimulus-driven lending boom might leave lenders with a mountain of bad loans.
Chinese media say local government investment agencies owe 6 trillion yuan ($880 billion) to state banks. An American researcher, Victor Shih of Northwestern University, estimates total local government borrowing in 2004-09 at 12 trillion yuan ($1.6 trillion).
The World Bank and China's central bank say banks could face losses if the agencies, known as "finance platforms," cannot repay their debts.
Local government finance platforms accounted for a "very high proportion" of last year's bank lending, a deputy central bank governor, Su Ning, said in March during the annual meeting of the national legislature. State banks lent a record 9.6 trillion yuan ($1.4 trillion) in 2009 under orders to support the stimulus.
"This could have potential risks," Su said in March.
Beijing spent some $400 billion over the past decade clearing away non-performing loans at state banks, which were long expected to lend to prop up government companies without regard to whether they could repay their debts.
That recapitalization was part of an effort to turn Chinese banks into profit-driven institutions that judged borrowers on commercial grounds. But after the global crisis struck in 2008, banks were ordered to relax lending standards and flood the economy with credit to support the stimulus.
The World Bank warned in a March report that the financing platforms' growing debts was one of a series of "macro economic risks" stemming from the stimulus.
Shih, the American researcher, says China has nearly 4,000 local government financing vehicles, which has obscured the scale of total government debt.
China's central government paid for only one-quarter of its 4 trillion yuan ($586 billion) stimulus plan. The rest came from state companies and borrowing by lower-level governments from state banks.
"The banking system in China will bear the brunt of the fallout, necessitating a massive bailout from China's budget and foreign exchange reserve," Shih said in a lecture in March at a Beijing business school.
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Associated Press researcher Bonnie Cao contributed to this report.


Updated : 2021-06-19 22:43 GMT+08:00