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China's Li says debt defaults 'hardly avoidable'
by Staff Writers
Beijing March 13, 2014

Chinese Premier Li Keqiang signalled on Thursday that Beijing was willing to accept debt defaults in the world's second-largest economy, which has a murky multi-trillion-dollar "shadow banking" sector. His comments come almost a week after the country's first-ever default on a domestic corporate bond and as traders grow worried that other firms could follow suit. Li said authorities "pay very high attention to the financial and debt risks", as he held his once-a-year news conference after the close of the annual session of the National people's Congress (NPC), the Communist Party-controlled legislature. He could not possibly "want to see" defaults in financial products, he said at the Great Hall of the People. "But I'm afraid sometimes certain individual cases of such defaults are hardly avoidable," he added. Shanghai-based Chaori Solar Energy Science & Technology Co. said Friday it was unable to make full bond interest payments of 89.8 million yuan ($14.7 million) sending it into default. And on Tuesday power equipment maker Baoding Tianwei Baobian Electric Co., said its bonds would be suspended from trading after it posted two consecutive years of losses. However, analysts said the Chaori default could benefit the market in the long term by raising awareness of risk and making investors more selective. "What we should do is to step up monitoring, properly handle relevant measures and be sure that there will be no regional and systemic financial risks," Li said. Early this year, worries surfaced in China over other financial products issued by trust companies, which have drawn comparisons to American "junk bonds" of the 1980s. Financial concerns in China also include high levels of local government debt as well as "shadow banking" -- a massive network of lending outside formal channels and beyond the reach of regulators. They include activities by online finance platforms, credit guarantee companies and microcredit firms. The "shadow banking" sector was as large as $4.8 trillion in 2012, more than half the country's gross domestic product, according to an estimate by ratings agency Moody's. But Li said authorities have a grip on financial and debt risks to the economy. "Last year we conducted a comprehensive audit of government debt that shows that the Chinese government has faced up to this challenge," he said. "We have released to the public the results of this comprehensive audit as it is, and the result shows that the risks are on the whole under control." In late December, China revealed in its long-awaited audit that liabilities carried by local governments ballooned to 17.9 trillion yuan as of the end of June. The figure, released by the National Audit Office in a statement on its website, compared with 10.7 trillion yuan as of the end of 2010 -- an increase of 67 percent. Concerns centre on borrowing by local authorities, which have long used debt to fuel growth in their regions, often by pursuing projects that are not economically viable or sustainable.


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