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China's local governments unlikely to go bankrupt, says Beijing think tank

Beijing think tank says Detroit-like bankruptcy unlikely because 'quality assets' behind the debt

PUBLISHED : Friday, 02 August, 2013, 12:00am
UPDATED : Friday, 02 August, 2013, 4:32am

Mainland cities are not at risk of bankruptcy and a Detroit-like financial failure will not happen on the mainland, a government think tank says.

Unlike cities in the West that had spent funds raised from debt issuance on refinancing, the debt of local governments in the mainland supported long-term investments, said Wang Yiming, deputy head of the academy of macroeconomic research under the National Development and Reform Commission (NDRC).

"China's local government debt is backed by quality assets," Wang told a media briefing in Beijing yesterday. The bankruptcy that occurred in Detroit would not happen in mainland cities, he added.

The city of Detroit, in the US state of Michigan, filed for bankruptcy in mid-July, making it the largest US city to fail in history. The city, which was a manufacturing hub for the automotive industry, has more than US$18 billion in debt.

With the government pursuing urbanisation and industrialisation, Wang said local governments were in need of long-term financing channels. Debt issuance is one option, he added.

Local governments in the mainland were capable of paying back long-term debt because they hold quality assets, Wang said, noting that they could even cash in their assets when necessary.

Song Li, deputy director for institute of economic research under the NDRC, said fiscal income alone was unable to support infrastructure and property development under the government's plan to push forward urbanisation. Debt issuance was, therefore, important because local governments could not fund their projects only with bank loans.

The debts were backed by property development and infrastructure facilities that could generate income, he said.

Li also said that the mainland's economy was on an upward trend, so that Chinese cities were not under the same bankruptcy risk as cities in the West.

On Sunday, the National Audit Office announced an audit of debts owed by all levels of the government under the instruction of the State Council. The move showed Premier Li Keqiang's determination to straighten out the economy.

Wang said the audit would help assess the amount of existing local government debt. "The audit will allow the government to better manage debt by classifying the debt."

Outstanding loans to local government financing vehicles amounted to 9.7 trillion yuan at the end of June, an increase of 6.2 per cent from a year ago, the China Banking Regulatory Commission said. The growth was 9 percentage points less than the average growth of various types of loans, it added.

Global banks estimate total loans to local government financing vehicles (LGFV) could hit US$3 trillion.

Commercial banks' outstanding bad loans totaled 539.5 billion yuan at the end of June, equal to a bad loan ratio of 0.96 per cent.

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