China: local government debt 'controllable'

China said Monday that risks from its local government borrowings were "controllable," amid fears that bad loans could derail the world's second-largest economy. Chinese banks have opened the credit valves in recent years to provincial financing vehicles -- intermediary agencies through which authorities borrow because they are officially banned from assuming debt directly. Excessive borrowing by authorities to fund infrastructure and other projects has sparked concerns among China's leadership about the risks the loans pose to the financial stability of the Chinese economy. On Monday, the finance ministry admitted there were "potential risks" in some areas of local government borrowing, but said most were under control. "Judging from the audit results, risks of China's local government debt are generally controllable," the ministry said in comments posted on its website. The State Council, or cabinet, vowed last month that it would continue to "clean up local government financing platforms" and look at setting up a mechanism to regulate the way authorities raise money. The remarks followed a central bank statement last month saying only a "small portion" of projects funded by local governments were unable to generate sufficient cash flow to serve the interest and principal payments. China's National Audit Office recently put the debt held by authorities at 10.7 trillion yuan ($1.67 trillion) as of the end of 2010, or about 27 percent of China's 2010 gross domestic product. Separately, a total of 2.8 trillion yuan in local government debt has been reclassified as loans taken by companies, the state-run China Securities Journal said Monday, citing an unnamed source. Regulators are seeking to lower the risks of these loans by, amongst other things, imposing stricter requirements for collateral, it said.