Sun, Jul 05, 2009 - Page 11 News List

China worried about investors repaying loans

DOORS AND WINDOWS: The central bank governor said there may be ‘big problems’ down the road because of fund-raising on the local level that is difficult to control


China’s massive economic stimulus plan has launched some projects that are wasteful, possibly making it hard for investors involved to repay bank loans, China’s central bank chief said yesterday.

“Some projects may be too wasteful, and some projects in local areas may endanger [investors’] ability to pay back loans,” Zhou ­Xiaochuan (周小川), the People’s Bank of China governor, told a forum at the Chinese Academy of Social Sciences, without elaborating.

Zhou’s comments underscored government worry about risks from the torrent of spending helping to shore up economic growth.

He said China should formally allow local governments to issue bonds to replace the current irregular practices.

“As the front gate is still closed, many local governments had to launch fund-raising platforms, which makes it harder to control, and there may be big problems in future,” he said.

Beijing announced a 4 trillion yuan (US$586 billion) stimulus package at the end of last year to help the economy to weather the global slowdown.

Banks have rushed to lend the money to government-backed ­projects across the country.

Zhou said many local governments were jostling for the money via their investment arms or other fund-raising vehicles and a significant amount of China’s newly offered loans has been used to fund municipal projects.

Last week, the People’s Daily, mouthpiece of China’s ruling Communist Party, warned that banks see loans to government projects as sure bets, and have sometimes become lax in assessing risks and likely returns.

Local Chinese governments are not allowed to issue bonds according to law. But a part of China’s stimulus plan and as an ad hoc practice, Beijing had issued 200 billion yuan bonds on behalf of provincial-level governments.

Many governments, however, have also been borrowing through controlled vehicles or by giving hidden guarantees for projects.

“You can see a lot of government financing activities, and you can see lots of municipal debts, it is clear that the demand [to issue municipal bonds] is there,” Zhou said.

“It is better to open the front door than to drive people to walk through backdoor or to jump through the window,” he added.

Meanwhile, a government researcher said yesterday at a different forum that China needs to promote domestic consumption to make up for weak global demand because its economic recovery isn’t firm.

“Global demand won’t recover to the pre-crisis levels within two to three years,” Xia Bin (夏斌), head of the financial institute at the State Council Development and Research Center, said in the southern Chinese city of Shenzhen. “The rebound we’ve seen in China’s economy in the first half has been driven by increased investment to make up for the slump in external demand.”

China has to boost domestic consumption by increasing household income and not just through gains from property and stocks, Xia said. The central bank should send a signal for stable money supply in the second half or “early next year” to guard against the risks of asset-price inflation, he said.

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