BEIJING - China's local governments should set up special funds to repay some of the 10,7-trillion yuan ($1,7-trillion) debt they owe and must use all their financial resources to do a "good job" in paying their creditors, Finance Minister Xie Xuren said yesterday.
Mr Xie said China would continue to take measures to ensure debt risks are under control and that Beijing was considering incorporating debts of its local governments into the national budget.
"Various local governments need to set up debt repayment funds to use all their fiscal resources available to repay their debts," Mr Xie told a news conference on the sidelines of China's annual parliamentary meeting, the National People's Congress.
"We ordered local governments to do a good job in repaying their debts."
Mr Xie did not elaborate on how debt repayment funds would work, or what the effect would be if Beijing were to include local government debt in the budget.
Nor did he define what "all fiscal resources" encompassed, a vital point for investors speculating that China will force local authorities to privatise or securitise assets to repay debts run up on infrastructure built at Beijing's behest to boost economic growth after the 2008-09 financial crisis.
Liu Qiao, professor at Peking University's Guanghua School of Management, said the central government could be considering a type of securitisation where local authorities package debt and issue bonds based on it.
"Maybe it's on a case by case basis to work it out. If there's a huge gap the central government will do something. But they first need to make sure which (debts) can be paid back," Prof Liu said.
"The central government is asking the local governments to closely monitor and see what they can pay. If they need help, they will need to justify it. The central government would be a last resort."
Many analysts believe local government debt could threaten China's banks if cash-strapped local governments default and saddle them with a stock of sour loans.
As banks supplied most of the local government loans, a domino effect could put overall financial system stability at risk in a worst case scenario.
Though China's local debt woes have festered for more than a year, Beijing has offered few details on the extent of the problem or possible solutions. The lack of information led some analysts to guess at least a fifth of loans, worth 2-trillion to 3-trillion yuan, have gone bad. They say that could cause banks' nonperforming loan ratios to more than quadruple to about 5%.
But the head of China's biggest bank said yesterday the lion's share of its local government loans were doing well and were backed by adequate cash flows.
Analysts expect state banks will roll over much of what is owed by local governments rather than report them as sour loans on their balance sheets.
HSBC estimates China's debt burden is still manageable at 55% of gross domestic product, but says the rub is in the cash shortage faced by local governments that could cause "a major bank default". Faster privatisation would save banks from bad loans that can easily quintuple or more, analysts say.
On fiscal policy, Mr Xie said that China would focus on improving its tax system and lowering structural taxes this year.