China's debt mounts to $2.78 trn, 43% of GDP

China may be sitting on world's highest foreign exchange reserves of about USD 3.20 trillion but it is also burdened with USD 2.78 trillion government debt causing great deal of concern among policy makers.

China's government debt amounts to about 17.5 trillion yuan (USD 2.78 trillion) about 43 per cent of the country's gross domestic product ( GDP), Yang Kaisheng, president of the Industrial and Commercial Bank of China, said today.

It is composed of 10.7 trillion yuan (USD 1.7 trillion) of local government debt and 6.8 trillion yuan of central government debt, Yang told a press conference on the sidelines of China's annual parliamentary session.

As the concerns over the debt mount, China's Bank regulator has said that the government will take steps to guard against possible defaults which could cause extensive damage to the financial stability of the country's banks.

China will boost the clean-up of thousands of millions of local government's debt in 2012, so as to guard against the possible defaults that would hurt its banks, China Banking Regulatory Commission (CBRC) said on March 2.

To start with efforts will be made to 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, it said.

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.

Analysts said any default of a certain proportion of the loans will push up non-performing loan ratios in the banking industry and threaten banks' credit ratings.

The concerns over the rising local debt prompted Chinese Premier Wen Jiabao to state last month that his government has taken the issue seriously.

"Currently our government debts are in an overall safe and controllable level," Wen said.

Besides the local debt, China's foreign debt has increased to USD 697.16 billion at the end of September, up from USD 548.9 billion in 2010.

Officials maintain that the debt is manageable as China is backed by USD 3.20 trillion forex reserves.