A Chinese local governments' debt crisis is unlikely to break out in China, but it is worth close attention, Xu Lin, an official from the National Development and Reform Commission, said at a forum Sunday.

Bank regulators and economists say they are increasing concerned that borrowing by local governments is fueling asset bubbles and may lead to a surge in bad debts at the nation’s banks. Local-government entities may have had 11.4 trillion yuan (US$1.7 trillion) in outstanding debt by the end of last year, according to estimates from Northwestern University Professor Victor Shih.

However, according to data from the China Banking Regulatory Commission, China’s outstanding loans to local governments’ financing platforms stood at 7.38 trillion yuan by the end of 2009, rising 70.4 percent year on year.

The risks posed by local government financing vehicles should not be exaggerated, government adviser Ba Shusong also wrote in the Shanghai-based Wenhui Bao last week.

Commercial banks in China are “very cautious” about lending to the investment arms of county-level governments who account for more than 70 percent of all such local authority entities, said Ba, who is deputy director-general of the Financial Research Institute at the State Council Development Research Center.

Very few local governments rely on land transfer income for more than 50 percent of their funding and most have many sources of income, he said.

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