The Ministry of Finance said yesterday that the risks of China's local government debt were "generally controllable," but there were some concerns.
Local governments as a whole have the ability to repay their debts, but some districts and industries are financially weak and potentially risky, the ministry said on its website.
"In some cases, governments rely too heavily on revenue from land sales to pay their debts, while in other areas debt pressure is exceptionally high for highway projects, colleges and hospitals," it said.
But the ministry suggested ways local governments can improve their payment abilities. "The liquidation of fixed assets, land and other resources owned by local governments can also help pay back their debts," the ministry said.
China Securities Journal said yesterday that local government debt levels would peak in 2011 and 2012, with 4.6 trillion yuan (US$719.8 billion) of loans coming due, or 43 percent of the total estimated loans governments have borrowed to pay for infrastructure and investments.
But the newspaper said that the risk level of local debts was "better than expected," and the regulator was taking moves to reduce banks' pressure to raise new capital.
The comments aimed to ease huge concerns over the sustainability of China's impressive economic growth after massive local government debts were disclosed in June.
Local governments, barred from borrowing directly, established 6,576 financing vehicles by the end of 2010 to fund projects such as new roads and airports, according to a report by the National Audit Office in June. They had 10.7 trillion yuan, nearly 27 percent of China's gross domestic product, in outstanding liabilities at the end of 2010, of which 8.5 trillion yuan was from bank loans.
The newspaper said that about a third of loans granted to local government financing vehicles, or some 2.8 trillion yuan, were determined to be low-risk and would be booked as general corporate loans.
That designation would allow banks to put aside fewer provisions for these loans, a move that would relieve the pressure on banks to raise fresh capital, the paper said, citing an unidentified "authoritative source."
Government officials and analysts warned of default risks because of a lack of liquidity under the central bank's tight monetary stance, and irregularities during operation.
"Local-government vehicles have found it difficult to repay debt this year because the cash shortage forced banks to lend less money," said Hu Hangyu, a Beijing-based bond analyst at Citic Securities Co, China's biggest brokerage.
Liu Jiayi, the auditor-general, previously said that "some management of local government financing platforms is irregular, and their profitability and ability to pay their debt is quite weak."
He proposed that the central government allow regional authorities to sell debt directly.
The finance ministry reiterated yesterday that China will speed up studying a mechanism for local governments to sell bonds to improve fundraising efficiency.
"They should no longer set up companies to fund public projects off their balance sheet or guarantee their debt," the ministry said.
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