2010-06-28 17:00

China's efforts to contain the risks from a surge in local-government debt may hurt growth in the world's third-biggest economy, investment bank China International Capital Corp said.

A report by the chief auditor last week indicated officials may take "relatively forceful measures" including strictly controlling new borrowing, CICC economists led by Hong Kong- based Ha Jiming said in a report today. The effect may be to "limit the source of funding for infrastructure projects and affect future economic growth."

Next year, after the end of existing fiscal stimulus, "the funding of infrastructure projects will face greater pressure, so fixed-asset investment growth may decelerate and we can't be optimistic about the outlook for the economy," the CICC economists said.

Chinese banks may face a wave of bad loans from lending to local-government financing vehicles, Victor Shih, a political economist at Northwestern University, and Citigroup Inc have warned separately.

Slowing growth

China's growth will decelerate to 9.3 percent in 2011 from 10.1 percent this year, according to the median forecasts in Bloomberg News surveys of economists. CICC didn't give a forecast for next year's growth.

In a "worst-case scenario," the non-performing loans of local-government financing vehicles could reach 2.4 trillion yuan ($350 billion) by 2011, Citigroup said in March.

The CICC analysts said today that the borrowing won't lead to a crisis for China for reasons including the government's growing revenue, relatively low level of debt overall and large asset base.

Liu Jiayi, the nation's chief auditor, indicated last week in a report to a standing committee of the National People's Congress that some local governments' debt burdens are excessive.

Fiscal risk

The official cited cases of debts amounting to more than 100 percent of local governments' available fiscal resources in an audit of 18 provinces, 16 cities and 36 counties. In one case, the level is 365 percent, Liu said.

Officials must "strictly control" local government borrowing and prevent "the financial risk evolving into a fiscal one," Liu said.

China's gross domestic product grew 11.9 percent in the first quarter of 2010 from a year earlier, the fastest pace in almost three years. The risk that the nation could have a "hard landing" has been one of the biggest sources of anxiety for global investors this year, Tim Condon, a Singapore-based economist at ING Groep NV, said last week.

China's banking regulator said June 15 that it sees growing credit risks in the real-estate industry and warned of increasing pressure from non-performing loans. The State Council, China's cabinet, this month ordered local governments to ensure repayment of debts by the financing vehicles and concentrate on completing projects already underway.