Local government debt remains grave challenge to China’s banking system

Debts are a heavy burden on public finance.

The China Banking Regulatory Commission said local government debt jumped to US$1.6 trillion this year, or 50% higher than total government revenues. Up to 40% of these debts will mature within the next three years.

CBRC said local government financing platforms have prominent potential risks that pose grave challenges to controlling debt. It aims to stop platform loans from further increasing and intends to orderly wind down existing loans while guaranteeing the financing needs of important projects.

The task, however, is getting harder to achieve because local governments are electing leaders and new officials always tend to spend heavily, CBRC said.

The platforms have increasingly relied on bank loans to finance new projects because most other channels to raise funds have been blocked over risk concerns.

CBRC said noted that some financing platforms had been circumventing restrictions to borrow through less-regulated channels because they are unable to get loans from banks.