Friday, 5 March 2010

China Drafts Rules to Rein in Local State Borrowing

China’s Ministry of Finance is taking the lead in drafting new rules to control fund-raising by local governments’ special purpose vehicles, a banking regulator said on Thursday.

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Guanyu 道 said...

China Drafts Rules to Rein in Local State Borrowing

Reuters
03 March 2010

China’s Ministry of Finance is taking the lead in drafting new rules to control fund-raising by local governments’ special purpose vehicles, a banking regulator said on Thursday.

Yan Qingmin, head of the Shanghai bureau of the China Banking Regulatory Commission, said these financing vehicles had borrowed a total of 6 trillion yuan ($879 billion) from banks by the end of 2009.

Speaking to reporters on the sidelines of the annual Chinese People’s Political Consultative Conference, a body that advises parliament, Yan said the new rules could be ready by the end of March.

Local governments are barred from borrowing in their own name. To get around that restriction, they set up special companies that mainly borrow from banks to finance investment projects.

Some economists have expressed alarm at the debts local governments have incurred, suggesting they could pose a long-term risk to China’s public finances if a large portion of the loans turn sour.

The China Securities Journal has reported that about 40 percent of China’s 9.6 trillion yuan in new loans last year went to local governments.

The 21st Century Business Herald, citing data from unnamed regulatory agencies, said on Wednesday that local governments might have taken on more than 8 trillion yuan in debt in all, including 7 trillion yuan in bank loans.

The government has already taken some steps to slow the borrowing binge and has called on banks to scrutinise the viability of projects they are being asked to finance.

Victor Shih, a professor of political science at Northwestern University in the United States, said in a recent report that he had examined 8,000 local government investment entities and concluded they had borrowed the equivalent of $1.6 trillion between 2004 and the end of 2009.

In a report on Thursday, Jing Ulrich, chairman of China equities and commodities at J.P. Morgan, played down fears that a crisis might be brewing.

“Looking ahead, while certain local administrations might struggle to service debt, the magnitude of public sector debt risks do not appear as severe as some have suggested,” she said.

Citing International Monetary fund forecasts, she said China’s government debt-to-GDP ratio is projected to reach 22 percent in 2010, compared with 94 percent in the United States and 227 percent in Japan.

“Even if the more alarming estimates of local government debt were included, the ratio would only grow to approximately 51 percent of estimated 2010 GDP,” she said.