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Bank of China warns economy still faces challenges

China's central bank warned Friday that the world's second-largest economy still faced challenges and uncertainties, pledging to maintain current policies to ensure stable growth.

One of the risks facing China was the surge in bank lending to local government financing vehicles, which was "hard to ignore", the People’s Bank of China said in its annual financial stability report.

"Domestic and international circumstances are still complicated and potential risks and uncertain factors still exist, posing challenges for China to maintain financial stability," the central bank said. "Continued efforts would be made to pursue the proactive fiscal policy and moderately loose monetary policy."

Fitch Ratings also warned Friday that China faced a potential "hangover" from the government's massive four-trillion-yuan ($586 billion) stimulus package implemented in response to the global financial crisis.

"Some of the costs of the stimulus may be yet to materialise on the sovereign's balance sheet, such as debts of local government investment companies," Andrew Colquhoun, head of Fitch Asia-Pacific Sovereigns, said in a statement.

The reports echoed comments earlier this week by Chinese Premier Wen Jiabao.

Speaking at the World Economic Forum's three-day "Summer Davos" in the northern port city of Tianjin, Wen said China was in "good shape" but lacked "balance, coordination and sustainability in economic development".

He also expressed concerns about the dangers posed by the heavy debt burden of local government financing vehicles, and pledged to intensify a crackdown on lending practices. State media said in July that 23 percent of the 7.66 trillion yuan extended to local government financing vehicles was in danger of turning sour.

Chinese banks lent huge amounts to provincial financing vehicles for construction projects last year after Beijing called for nationwide efforts to spur the economy. Local governments are barred by law from borrowing directly from banks.

Last month, policymakers attempted to ease concerns about the dangers of a new crop of bad debts emerging from local government lending, saying there was no systemic risk.

China's banking regulator on Friday nevertheless urged lenders to improve risk management and avoid an excessive expansion in their business, Dow Jones Newswires said. Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, told a financial forum in Shanghai that bad debts posed the biggest risk to the banking sector.

Source: AFP
Date: 18.09.2010 [264]
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