BEIJING, Nov 8 (Reuters) - Chinese local governments are likely to face rising credit risks as property prices cool, but the overall level of government debt in China remains well below international danger levels, a leading domestic ratings agency said on Tuesday.
“The tightening measures to cool the property market may further dampen land sales in the future, which could raise local debt default risks to some extent,” Li Yan, a senior analyst at the China Chengxin International Credit Rating Co, said.
But Li told a conference that China’s total local and central government debt combined, at 43.6 percent of gross domestic product at the end of 2010, was well below the international alarm level of 60 percent.
China’s state auditor has estimated that local governments had chalked up 10.7 trillion yuan in debt by the end of 2010, about half of which amassed during Beijing’s stimulus spending at the height of the 2008/2009 global financial crisis.
Local governments have been servicing much of that debt through land sales and real estate transaction taxes, both of which are slowing in response to a slew of tightening steps to curb the exhuberant property market and fanning worries of a new wave of debt defaults and bad bank loans.
The weighted-average capital adequacy ratio (CAR) of Chinese banks stood at 12.2 percent at the end of June, up from 11.8 percent at the end of March, while the banking system had a bad loan coverage ratio of 218 percent, according to figures from the China Banking Regulatory Commission.
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Li said that the overall risks from the local government debt mountain are manageable as Chinese cities and provinces could get money from many other channels to secure repayments, such as tax refunds and transfers from the central government, as well as municipal bonds issued under a pilot scheme.
China has allowed its first batch of cities and provinces to sell municipal bonds, borrowing direct from the capital market to reduce reliance on bank loans.
“Looking in the long run, I think the local government debt risk is within a controllable range,” added Li, whose firm works in partnership with Moody’s Investors Service. (Reporting by Aileen Wang and Kevin Yao; Editing by Nick Edwards)