But default risks are monitored and controllable, say finance officials

Local government borrowing will become more common as the Chinese economy continues to face downward pressure, but the overall outstanding debt level will continue to drop, said a top Ministry of Finance researcher on Thursday.

"The central government's expenditure of 850 billion yuan ($135 billion) this year will not be adjusted, which means that local governments will have to borrow more to finance the infrastructure construction projects just announced to help shore up the sliding economy," said Jia Kang, director of the ministry's fiscal science research center.

Jia made the remarks during the China-Arab States Workshop on Finance Cooperation, being held in Yinchuan, capital of Ningxia Hui autonomous region.

But he insisted the likelihood of more local government borrowing does not present higher risks, as the central government has been fully aware of the possibility, and had taken effective measures to ensure levels are kept under control.

"The key is to make sure the debts are monitored, and that there are adequate mechanisms in place to guard against possible defaults," Jia said, adding that aggregate local debt will continue to decline as more loans are repaid.

Despite increasing fiscal pressures, the official gross domestic product growth target of 7.5 percent can be met, as the economy will rebound in the fourth quarter, he said.

"The debt risks can be contained as long as we make sure those debts grow at less than 7 percent."

The Ministry of Finance is conducting a financial audit of local government debt to identify any fiscal and financial risks that might exist, Beijing Business Today reported on Thursday, citing Liu Jianhua, the ministry's senior inspector.

Although risks related to local government debt are "controllable", the government needs to prevent unlimited increases in them, the newspaper said, quoting an official at the National Development and Reform Commission.

About 20 percent of China's city governments, and 30 percent of governments at county level, have debts above 100 percent of fiscal revenue.

The total outstanding debt of local governments was 10.7 trillion yuan by the end of 2010, according to official statistics.

Most major State-owned lenders, including Bank of China Ltd, China Construction Bank Corp and Agricultural Bank of China Ltd, have reported that outstanding loans for the first half of the year have risen compared with the previous six months.

Adding in existing debt at Industrial and Commercial Bank of China, the total debt for all Big Four State banks was 2.6 trillion yuan by the end of June, up by 500 billion yuan from six months before.

Bank loans are the source of about 80 percent of all local government debt, taken out through finance vehicles, and the four banks were the source of nearly 50 percent of the total.

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