A government official said on Monday that debts incurred by local governments are different from those found in the debt-laden United States and the European Union (EU), adding that the likelihood that local governments will default on their debts is low.
Xu Lin, director of the Monetary and Financial Department of the National Development and Reform Commission (NDRC), the country's top economic planning agency, made the remarks in a statement posted on the commission's website.
Xu said China has learned a valuable lesson from the current debt crises in the United States and the EU, adding that it is imperative to adopt new measures that will help local governments manage their debt and guard against risks.
He said China's local government debts, particularly those raised through local government financing vehicles (LGFVs), are largely used to build infrastructure, which indirectly generate revenue and boost local economies.
Xu noted that China has strong solvency, given the rapid growth of its economy and fiscal revenues. In addition, the amount of realizable assets held by local governments is "quite large," he said.
According to the National Bureau of Statistics, China's gross domestic product (GDP) rose 9.6 percent year-on-year to reach 20.446 trillion yuan (3.2 trillion U.S. dollars) in the first half of this year. The country's national fiscal revenue jumped 30.5 percent from a year earlier to 6.67 trillion yuan in the first seven months of this year.
Local government debts totaled 10.72 trillion yuan as of the end of 2010, or roughly 26.9 percent of the country's GDP, according to data released by the National Audit Office in June. If debts owed by the central government are included, the total debt is still less than 50 percent of China's GDP.
Xu said that governments and supervisory departments at multiple levels have introduced risk-reducing measures against local government debts since the second half of 2009.
"It would be very unlikely for our local governments to default on their debts," he said, adding that local governments' investments and debts must be kept within a reasonable scope to avoid systematic debt risks.
China's banks have been ordered by the China Banking Regulatory Commission to stop providing loans to local governments for unapproved projects and to tighten credit management in order to prevent debt increases.
Concerning the weak subscription of bonds sold by LGFVs, also known as quasi-municipal bonds, Xu said that rising yields for such bonds show that investors are more experienced in handling risks.
"It is unnecessary to panic or even go short on those bonds based on unreasonable judgments," Xu said, citing normal repayment of capital and interest on such bonds, as well as strict and transparent requirements for bond issuance.
Chinese cities usually use capital raised through selling quasi-municipal bonds to fund infrastructure construction.
Xu said the increased difficulty in selling corporate bonds via the LGFVs is the result of monetary policy changes and investors' worries about local government debt risks.
He said that investors' worries have reminded the NDRC to pay more attention to the potential risks of such bonds and to take measures to protect bond investors' interests.