Credit risks remain at local governments, report says

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CREDIT risks persist for county-level governments in China that require abundant cash flows to repay their debts, but the systemic risk is unlikely to emerge due to strong economic fundamentals, Standard & Poor's Ratings Services said in a report today.

The default risk of local governments' financing platforms could rise significantly in the next two years as cash-flow needs of the sub-provincial governments remain high and liquidity positions weaken, Standard & Poor's said.

"The risks are particularly high for county-level governments that have incurred high-cost, short-term borrowing from non-bank financial institutions," said Kim Eng Tan, analyst at the agency in the report.

"Some may find themselves trapped in a cycle. They may have to spend more on infrastructure to generate higher receipts from land sales. And that's just so they can reap enough profits from such sales to repay the debt incurred earlier for infrastructure investment," Tan said.

The report also noted the possibility that future extraordinary support from the central government could rein in local government's new borrowing.

"We believe China can avoid any systemic economic risk from such debt because key supporting factors from the past are still in place. These include the central government's strong financial strength, its commitment to preventing systemic risk, and China's strong economic fundamentals," Tan said.

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