Local government debt could threaten banks

Local governments who borrowed heavily from China’s banks during the financial crisis may have trouble paying back their debts, AP reported, citing the deputy governor of China’s central bank. Su Ning told reporters at a news conference that China’s banks could be at risk if local governments default on significant loans taken out for infrastructure and real estate projects. Su declined to reveal how much the finance arms of local governments were in debt to China’s banks, but said that it accounted for a "very high proportion" of bank lending last year. Chinese media claims that local governments borrowed a total of US$880 billion while American researcher, Victor Shih, puts the figure closer to US$1.6 trillion in the five years preceding 2009. On Friday, Premier Wen Jiabao warned that China’s banks face risks after a record surge in lending last year.