China's Finance Minister Lou Jiwei on Wednesday called the scale of the nation's local government debt controllable, adding the growth of debt was slowing, and the risk of default was "not that great".

He admitted local governments do face "relatively big" debt problems, especially those that previously saw very rapid revenue growth.

"They thought they would have money forever, so they took the risk of borrowing," Lou said in an interview with China Central Television. "For a period of time, their fiscal revenue grew 50 percent. They thought the growth would be 50 percent for the next five years, so they spent the money first."

He said China will improve its supervision of how local governments use money raised through bond sales. The funds should only be used for expenditure on construction. They should not be used for day-to-day expenses because doing so would be a "dead end", he said.

Local governments that borrowed money for projects which are now generating good cash flow should use that income to pay off debt, Lou said. China may use fiscal revenues to pay back some local government debt accumulated to provide for the "public good", he said.

Lou's remarks echoed earlier comments by President Xi Jinping, who said during an official visit to Central Asian countries that the government is able to deal with problems of local debt.

Lou's comments on the government debt situation corresponded with an earlier report by the Development Research Center of the State Council, a think tank under the cabinet, which concluded a government debt bubble is unlikely to burst in the short term.

The report said by using conservative calculations, government debt as a proportion of gross domestic product would reach 26 percent by 2020. Under a high-risk scenario, the figure would be 30 percent, still within the margins of safety.

As concern over local government debt has increased, the State Council in July ordered the National Audit Office to conduct a new survey of all government financial obligations. Results are not yet available.

In 2011, the office carried out an audit across the country and concluded local government debt stood at 10.7 trillion yuan ($1.75 trillion) at the end of 2010. There has been no official nationwide survey since, but local debt is believed to have surged in the following years, after a government spending boom.

zhengyangpeng@chinadaily.com.cn

(China Daily USA 09/05/2013 page13)