For local government debts, transparency seen as a necessity (2)

China has seen mounting leverage in its economy over the past five years. On top of this, a considerable part of new lending in recent years was conducted via shadow banking, which was a major resource of financing for local governments, said Qian Xuening, deputy secretary-general of the Lujiazui Institute of the Chinese Academy of Social Sciences.

Xiang Huaicheng, minister of finance from 1998 to 2003, said at the Boao Forum for Asia Annual Conference 2013 in Hainan province on Saturday that he estimated the debts accumulated by local governments to stand at somewhere around 20 trillion yuan, nearly double the official estimates.

Debt ratio is not considerable and domestic debt accounted for 95 to 98 percent of total debt, which helps to guarantee the overall health of the leverage level, Xiang said.

Xu of CEIBS said he does not think a debt crisis such as the one the eurozone is experiencing will occur in China because governments at various levels have large amounts of assets that they may sell to pay off debts.

However, it is not easy to sell State-owned assets as ownership may result in controversies, and some assets, such as those of railways, are unlikely to be sold, he said.

Economists said financial institutions, especially banks, need to watch out for non-performing debts as result of local governments' unsuccessful projects.

"Prevention of the risks emerging in local governments' financial platforms is essential for financial institutions," said Wu Xiaoling, a former deputy central bank governor and director of the CEIBS Lujiazui Institute of International Finance.

Pan Yingli, professor of finance at Shanghai Jiao Tong University, suggests the establishment of a mechanism to enable local governments to issue bonds for trading in Hong Kong.

"Under the mechanism and Hong Kong law, international capitalists and investors can restrain local governments' financial behavior; local governments should push forward transforming their financial decision-making to achieve more transparency and a more scientific and democratic decision-making process," she said.

Xiao Geng, research director and senior researcher at the Jinglun Institute for International Economics, said there will be no solution for local government debts without infrastructure that defines the ownership and settlement of assets and debts before local governments can issue bonds.

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