China Investment Drive May Imperil Local Governments

By Bloomberg News

Sept. 22 (Bloomberg) -- Chinese local governments risk insolvency by guaranteeing bank loans to investment projects, a domestic newspaper reported, citing a central bank official.

Investment vehicles backed by local governments pose fiscal and financial risks, the 21st Century Business Herald reported today, citing Vice Governor Liu Shiyu. He spoke at a company event in Beijing yesterday, the paper said. A central bank spokesman couldn’t be contacted by phone this evening to confirm the comments.

China’s central government is funding a third of a 4 trillion yuan ($586 billion) stimulus package that spans spending on roads, railways and low-cost homes and runs through 2010. Local governments are putting land, shares or other assets into investment vehicles that borrow from banks for fixed-asset projects, the newspaper said.

“The central government should account for a greater share of the funds needed for the stimulus projects or open the bond market to local governments to stem risks building up in the banking system,” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong.

Local-government liabilities tripled to 5.26 trillion yuan as of May 31 from the start of 2008, the Guangzhou-based 21st Century Business Herald reported, citing data from unidentified banks.

Budget Deficit

China plans a record 980 billion yuan budget deficit this year, including 200 billion yuan of bonds sold on behalf of local authorities, who can’t sell the securities themselves.

The central government should let qualified local authorities sell municipal bonds rather than rely on bank loans, central bank official Liu said, according to the newspaper.

Government-led investment is driving the recovery of the world’s third-biggest economy after exports slumped because of the financial crisis. China needs to maintain a proactive fiscal policy and moderately loose monetary policy, the Ministry of Industry and Information Technology said in a statement on its Web site today.

The Asian Development Bank raised today its forecast for China’s economic growth this year to 8.2 percent from a previous estimate of 7 percent. It increased its 2010 forecast to 8.9 percent from 8 percent.

--Li Yanping. Editors: Paul Panckhurst, Stephanie Phang.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net