China will boost the clean-up of thousands of millions of local government's debt in 2012, so to guard against possible defaults that would hurt its banks, the country's banking regulator said Thursday.
The country will focus on cleaning up old loans made to local government financing vehicles (LGFV) while tightening new debt issues and raising cash to debt coverage ratios, China Banking Regulatory Commission (CBRC) said on its website.
The CBRC will strictly control the use of LGFV loans, while giving priority to key projects that are under construction, it said.
The regulator will also improve risk monitoring and reclassify LGFV loans to relieve pressure from banks.
Local government debts had risen to 10.72 trillion yuan (1.7 trillion U.S. dollars) by the end of 2010, accounting for about 26.9 percent of China's gross domestic product, according to data released by the National Audit Office.
Analysts fret that if a certain proportion of the loans have gone sour, it will push up non-performing loan ratios in the banking industry and threaten banks' credit ratings.
Local governments typically invested the money they borrowed in building infrastructure. They also faced huge repayment pressure in 2011 and now also in 2012.
China's banks had 9.1 trillion yuan of outstanding loans issued to LGFV as of Sept. 30, 2011, the Shanghai Securities News reported last month, saying at least 65 percent of these loans were fully covered by cash flows.
The nation's local government debt is overall safe and controllable, Premier Wen Jiabao said in the country's financial work conference at the beginning of this year.
Revenues and expenditures via the LGFV will be included in the government's budget management while a mechanism will be established to control the gross local government debts through a risk-warning arrangement, Wen said.