China Economy

Premier pledges continued steady investment growth

Li Keqiang makes commitment to infrastructure building amid fears over local government debt

PUBLISHED : Thursday, 18 April, 2013, 12:00am
UPDATED : Thursday, 18 April, 2013, 5:33am

The mainland will continue to increase investment at a "reasonable" pace, Premier Li Keqiang was quoted as saying yesterday, while promising to control risks arising from the pile of local government debt.

State radio quoted Li as saying Beijing would step up efforts to build roads, railways and other infrastructure projects across the country, and to advance financial reforms by freeing up its interest rate market and capital account.

"We will actively expand domestic demand and improve policies to boost consumption," Li was quoted as saying. "We will make the effort to effectively control risks from local government debt."

Investor concerns about the mainland's credit risks have been rising after rapid growth in state investment following the 2008-09 financial crisis led to prolific government borrowing from banks.

The South China Morning Post reported on Tuesday that the China Banking Regulatory Commission recently issued a circular outlining steps to tighten its grip on these loans. The measures included containing credit to substandard financing vehicles, prohibiting banks from guaranteeing bond issuances by local government financing vehicles (LGFVs) and setting up comprehensive records monitoring lenders' exposure to the sector, according to bankers briefed about the move.

"The prudent stance is generally a continuation from last year, but this time the regulator stressed preventing risk contagion from non-bank financial entities," said Fang Yan, an analyst at Guosen Securities.

Financial institutions' exposure to LGFVs has been growing, thanks to the four trillion yuan (HK$5 trillion) stimulus Beijing introduced to combat the global financial crisis.

Much of the money that poured into the economy from banks, trust firms and bond markets has since flown to these vehicles to finance the construction of unpromising infrastructure projects. There was at least 10.7 trillion yuan of local government debt at the end of 2010, official data shows. Some analysts estimate it may have grown to 13 trillion yuan by the end of last year.

Analysts fret that a significant portion of the debt, the bulk of which is in bank loans, could sour as many infrastructure projects are for public use and not profitable. The fear is that widespread defaults may destabilise the banking system.

Yet Li did not suggest that the mainland is about to slow its pace of state investment. He said Beijing would step up efforts to build infrastructure across the country.

"We will keep a reasonable scale of investment and beef up efforts to construct urban roads, rail transit system[s] and infrastructure projects for environmental protection. China's economy grew at a steady pace in the first quarter, and overall it is in good shape."