Local governments are borrowing ever more from banks even though the central government has tried since the beginning of last year to prevent them from doing so, a former top banking regulator said on Tuesday.

"The debt figure is still rising because the government has encouraged banks to channel credit to projects that are now under construction and to keep doing so until they are completed," said Liu Mingkang, former chairman of the China Banking Regulatory Commission. "That is not quite necessary in my view."

He said banks should not keep lending money to projects arising from industries that are struggling with overcapacity.

Liu is a member of the Chinese People's Political Consultative Conference National Committee. He made his remarks at a group discussion at the conference.

He said local governments now hold about 11 trillion yuan ($1.7 trillion) in debt and that bank loans account for 80 percent of that amount.

Officials have said that a large systemic risk is posed by loans that were made to local governments through financing vehicles - business entities run by the governments. Those warnings began to arise after the country embarked on stimulus spending during the 2008 global financial crisis and after 9.59 trillion yuan were loaned out by banks in 2009 to counter a weakening demand for the country's exports.

"The loans that were made in 2009 were not excessive given the economic situation at the time," Liu said. "But we did fail to inspect each of the lending projects carefully."

He said a major move forward in curbing risks related to such loans is that local governments were ordered to include the lending into their budget.

"But the problems are whether such a policy could be put into effect and whether Premier Wen's call for governments to publish their fiscal budgets, as well as their accounts, can be answered," Liu said.

"If we don't solve this problem at the root, we will continue to trip over the same stone many times in the future."

The fourth quarter of 2011 saw an increase in the amount of outstanding non-performing loans that lenders hold and a rise in the ratio of such loans to lenders' total outstanding loans.

"The risks of local government debts are still controllable," Yan Qingmin, assistant chairman of the CBRC, said on Sunday.

"The increase has been a natural response to the economic slowdown."

Yang Kaisheng, president of the Industrial and Commercial Bank of China Co Ltd, the biggest lender in the world by market value, said local governments' bad-loan risks are controllable since they are capable of repaying their debts.

"It's not necessary for local governments to pay off their debts if their financing vehicles have enough cash flow," Yang said.

About 90.4 percent of the loans made by the ICBC to local governments are fully covered by cash flows generated from their local government financing vehicles. And about 6.6 percent are basically covered, meaning that 70 percent of the amounts of those loans are covered by cash flows from the financing vehicles, he said.

By the end of 2011, 0.94 percent of the bank's loans were bad and 0.73 percent of its lending to local governments was composed of non-performing loans.

You may contact the writers at wangxiaotian@chinadaily.com.cn and lanlan@chinadaily.com.cn

(China Daily 03/07/2012 page14)