The mainland will have to rely more on sovereign-debt issues and domestic borrowing to finance its infrastructure spending in the wake of escalating difficulties for local governments and corporates borrowing from the international market, according to BNP Peregrine. Speaking at 'The Chinese World - New Challenge' seminar, sponsored by the French Government, BNP Peregrine executive chairman Francis Leung said the closure of Guangdong International Trust & Investment Corp (Gitic) indicated the mainland's determination to clean up its financial sector. He said the Gitic incident - alongside well-documented non-performing loan problems - had made it harder for local governments and corporations to borrow in the international capital market. He estimated that during the first nine months of this year the inflow of foreign funds into the mainland was US$37 billion, down about 14 per cent from the same period last year. Foreign direct investment (FDI) during the same period grew by just 0.9 per cent to $36 billion. BNP Peregrine expects FDI for the whole year to decline 8 per cent from last year to $40 billion. Mr Leung expects Beijing to implement an expansionary fiscal policy next year to attract foreign capital. Given the increasing difficulty of borrowing internationally, the Chinese Government would use its sovereign capacity to borrow from other governments and multinational agencies, including the World Bank, he said. Those funds are expected to be allocated for use by local governments and corporates. Mr Leung said the huge pool of customer deposits and liquidity parked in the mainland's banking system should provide another source of funds for the central government to finance infrastructure spending. Attending the same seminar, Thomson BankWatch president Philippe Delhaise said the Gitic incident represented a important sign that the central government wanted to get rid of the moral hazard of international lending by mainland entities with weak fundamentals. Moral hazard exists when lenders extend credit recklessly to corporates, hoping the government backing for those corporates meant no downside risk for the lender. Mr Delhaise said the removal of moral hazard would mean lenders should analyse in the future the strength of their mainland borrowers on a stand-alone basis rather than betting on the validity of government guarantees.