BEIJING (AFP) – Chinese local governments held $1.65 trillion in debt at the end of 2010, the state auditor said Monday, warning there is a risk some could default amid fears that bad loans will harm the economy.
Excessive borrowing by authorities to fund infrastructure and other projects has sparked concerns among China's leadership about the risks the loans pose to the financial stability of the world's second largest economy.
By the end of last year, local governments had 10.7 trillion yuan ($1.65 trillion) of debt, the National Audit Office (NAO) said in a statement, or about 27 percent of China's 2010 GDP of 39.8 trillion yuan.
"The ability of some areas and industries to repay debt is weak and potentially risky," the NAO said.
The announcement represents the first time China has given an overall figure for local government debt, according to the state-run Xinhua news agency.
The state auditor said some local governments had to make new borrowings in order to pay back old loans, and some are depending heavily on revenue from land sales to meet their repayments.
Auditors also found that 108.3 billion yuan of total borrowings had been issued or used improperly, citing methods such as providing fraudulent collateral or diverting the funds raised into capital or real estate markets.
Chinese banks last year loaned huge amounts to provincial financing vehicles -- intermediary agencies through which the governments take out borrowings because they are officially banned from assuming debt directly.
The credit was used to fund construction projects after Beijing called for nationwide efforts to spur the economy on the back of the global financial crisis.
The Asian nation has managed to power out of the crisis thanks to a stimulus package worth four trillion yuan and state-backed lending.
As a result, new loans nearly doubled to 9.6 trillion yuan in 2009. Last year, new lending fell to 7.95 trillion yuan but still exceeded the government's 12-month target.
The surge in credit has fuelled fears of inflation and bad loans, and the government is now moving aggressively to rein in lending activity.
It has hiked interest rates and increased the amount banks must keep in reserve over the past several months, as it tries keep a lid on consumer price rises and cool the economy amid concerns over overheating.
In May, however, the consumer price index in China rose 5.5 percent year on year -- way above the government full-year target of around four percent -- with many analysts expecting the rate to increase even further this month.
The NAO suggested that efforts should be made to "properly resolve" the current local government debt situation, based on a principle that says "the borrower must bear responsibility."
The provincial financing systems must be "cleaned up and regulated", it said.
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