MANILA (XFN-ASIA) - An Asian Development Bank official has expressed concern about local government debt in China, warning it could threaten banking sector stability.
Klaus Gerhaeusser, head of the ADB's East Asia Department, told a conference that Beijing was concerned about the "liabilities of the provincial and local governments, whose borrowings have been increasing rapidly in recent years."
Much of the money was owed to the banking sector, he said Thursday in China, with his comments published by the ADB on Friday.
Opaque and complex transactions made measuring Chinese local government debt "a challenge," he said, adding a system to regulate such borrowing had yet to be fully established.
"Consequently, much of these borrowings are not captured in the budget and their true magnitude is thus not known."
Local government units accounted for 75 pct of all Chinese public spending and employed some 95 percent of the bureaucracy, but raised under half of total public revenues, he said.
Chinese law allows provincial and local governments to borrow only indirectly, from the central government and external aid agencies, he said.
"Yet, in practice, provincial and local governments have been borrowing using various vehicles, including state-owned enterprises, and other state agencies and institutions, such as hospitals and educational institutions, often with guarantees -- explicit or implicit," Gerhaeusser said.
He said Chinese regulators must "tighten appraisal of lending to state-owned enterprises and local governments" and introduce an independent credit rating system for them.
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