Local governments in China had incurred about 10.7 trillion yuan ($1.65 trillion) in debt as of the end of 2010, about half of which was held by financing vehicles, the national audit office said on Monday in its first-ever audit of local government finances.
The audit office said efforts would be made to "clean up and regulate" local government financing vehicles on a principle of "the borrower must bear responsibility," and that different approaches would be adopted to tackle different government debts in a "proactive and steady" manner.
Of the total, debt among financing vehicles operated by local governments amounted to 4.97 trillion yuan at the end of 2010, it said, presenting the results of its audit to parliament.
By the end of 2010, provincial, municipal and county-level governments had 6,576 financing vehicles. Three provinces, 29 municipal cities and 44 counties had more than 10 vehicles each.
Of the 6,576 vehicles, 358 vehicles were found to have borrowed new loans to cover expiring loans and 148 were found to have defaulted, with the default ratio at 16.38 percent.
Financing vehicles would be barred from incurring new debt, while local governments would be allowed to issue bonds, the audit office said.
The central government would tap its deep pockets to repay the debts of some local authorities, the audit office said.
Beijing's assessment of the state of finances of local governments is by far its most comprehensive ever, and underscores its determination to head off credit risks among heavily-indebted local authorities.
It also comes after sources told Reuters last month that Beijing planned to clean up billions in local government debt by shifting 2-3 trillion yuan of debt off the books of local governments.
Many investors have long eyed China's pile of local government bad debt as a major risk to the economy, especially as growth slows, but few see a widespread banking fallout as they believe cash-rich Beijing will step in to absorb losses if necessary.
The US Congress moved closer to punishing China for allegedly manipulating its currency, as a key committee of the House of Representatives voted to advance legislation that could