Ability to honor debts under review to prevent risk of defaults

The credit status of local governments is being evaluated to gauge debt-paying capacity amid their growing financial demands.

The evaluation, by Dagong Global Credit Rating, was welcomed by financial analysts as a measure to regulate vast local government debt and prevent defaults.

The assessment uses a rating system unveiled by Dagong in Beijing on Monday.

The system is the first to evaluate local government debt globally using an alternative method to that used in the West, according to Guan Jianzhong, president of the rating agency.

The global financial crisis caught many institutions in the West off guard, and this system will help gauge the ability to repay debt and not just the debt itself. "Local governments are normally not aware of their repayment ability," Guan said at a news conference.

"Some local government financing vehicles are taking out new loans to repay old ones, as their profits cannot even cover financing costs," he said.

Local governments, barred from directly selling bonds or taking bank loans, have set up more than 6,500 companies, known as financing vehicles, to raise money for projects.

Official data on local government debt stood at 10.7 trillion yuan ($1.72 trillion) by the end of 2010. A report by Changjiang Securities estimated the figure might have grown to 12 trillion yuan by the end of 2012, citing the 320 billion yuan investment in infrastructure and 900 billion yuan urban development investment in the last two years.

On Dec 31 the Ministry of Finance launched a notice to "limit the irregular financing of local governments", after the banking regulator called in November for tougher regulations on infrastructure investment.

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