Borrowing by thousands of companies set up by China's local governments to fund construction is the nation's equivalent of the United States' subprime mortgage crisis, said Cheng Siwei, a former deputy head of the country's top legislative body.
"Our version of the US subprime crisis is the lending to local governments, which is causing defaults," Cheng said at the World Economic Forum in the Chinese city of Dalian on Friday. He served as vice-chairman of the standing committee of the National People's Congress from 1998 to 2003.
Cheng's comments contrast with statements by government officials and Chinese executives who have sought to allay concerns that 10.7 trillion yuan ($1.7 trillion) of outstanding local government debt will saddle banks with soured loans and derail economic growth. The President of China Merchants Bank Co, Ma Weihua, this week said the chances of "large scale" non-performing assets are "impossible".
Local governments in China, barred from directly selling bonds or taking bank loans, have set up more than 6,576 companies to raise money for roads, sewage plants and subways.
On Friday, Cheng said it would be the "wrong practice" for the central government to bail out these companies even though it has the capability to do so. Local governments that don't have a lot of debt should not rescue those that have become highly indebted, said Cheng.
Find out more at http://www.chinadaily.com.cn/bizchina/2011-09/17/content_13724904.htm
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