Beijing  : China will control risk arising from local government debt, Premier Li Keqiang was quoted as saying on Wednesday, while assuring the public that the world’s No. 2 economy was in “good shape”.
Li made his comment on debt in passing, but it came after Fitch Ratings and Moody’s Investors Service cut their outlooks or ratings for China on concerns that local governments were borrowing excessively.
“We will make the effort to effectively control risk from local government debt,” Li was quoted as saying on state radio.
China’s government debt ballooned after the 2008/09 financial crisis as authorities borrowed to build infrastructure and pump-prime the economy. Zhang Ke, a senior Chinese auditor, was quoted by the Financial Times as saying on Wednesday that China’s local government debt was “out of control” and could spark a bigger financial crisis than the U.S. housing market crash.
China had at least 10.7 trillion yuan of local government debt at the end of 2010, official data shows, and some analysts estimate the pile may have grown to 13 trillion 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 in China are for public use and not profitable. The fear is that widespread defaults may destabilise China’s banking system.
Yet Li did not suggest that China is about to slow its pace of state investment. He said China 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 and infrastructure projects for environmental protection,” Li was quoted as saying. “China’s economy grew at a steady pace in the first quarter and overall it is in a good shape.”
Moody’s cut the outlook on China’s government bond rating to stable from positive on Tuesday, while affirming its Aa3 rating. It noted that China’s poor information disclosure over its government debt fed into investor uncertainty. Moody’s downgrade came a week after Fitch cut China’s long-term local currency credit rating to A-plus from AA-minus, citing concerns about the risk that excessive local government borrowing posed to the wider economy.
Fitch estimated that China’s overall sovereign debt was worth 74 percent of gross domestic product by the end of 2012, of which 49 percent is central government and 25 percent is local.