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UPDATE 1-China to crack down on illegal local govt debt-raising activity
June 30, 2017 / 10:28 AM / 5 months ago

UPDATE 1-China to crack down on illegal local govt debt-raising activity

* Local debt risks fall due to tight oversight- official

* Says illegal local debt-raising activities persist

* Says 4.7 trln yuan in local debt to be refinanced

* Rising interest rates hamper local debt issuance (Adds quotes, details)

BEIJING, June 30 (Reuters) - China will crack down on illegal debt-raising activities by local governments, even as local debt risks are decreasing due to tight oversight and a debt refinancing scheme, a Finance Ministry official said on Friday.

The government has tightened controls in recent years on new local government debt to help ward off risks following a borrowing binge since the global financial crisis.

“Local government debt risks have been falling in recent years, but we cannot deny that there are illegal debt raising problems in some regions,” Wang Kebing, deputy director general of Budget Department of the Ministry of Finance, told reporters.

Since 2015, the ministry has tightened rules on local debt, banning local governments from providing guarantees for debt issued by local government financing vehicles (LGFVs), he said.

Local governments can only issue bonds within the annual quota set by the parliament, he said.

China capped the size of outstanding local government debt at 18.8 trillion yuan ($2.72 trillion) in 2017, up from 17.2 trillion in 2016, according to the annual budget.

In 2015, local governments were allowed to swap 3.2 trillion yuan in higher-cost, maturing debt into lower-cost, longer term bonds, in a step to help ease their debt burdens.

A total of 8.1 trillion yuan in local government debt was swapped in 2015 and 2016, and a further 4.7 trillion yuan will be refinanced, Wang said, adding that no cap on such debt swaps has been set this year.

In May, Moody’s Investors Service downgraded China’s credit ratings for the first time in nearly 30 years saying it expected the financial strength of the economy to erode in coming years as growth slows and debt continues to rise.

Some local governments are delaying debt issuance due to rising interest rates, but slow local government bond issuance will not affect local economic growth, Wang said.

China’s overall debt risks remained under control as the economy maintained steady momentum, Wei Qiang, spokesman for the National Audit Office, told reporters.

A recent audit of selected cities and counties in 16 provinces showed their outstanding debt grew 87 percent from June 2013 to March this year, he said. (Reporting by Kevin Yao; Editing by Richard Borsuk)

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