2010-11-04 11:00

BEIJING - Debt incurred by China's local government financing vehicles will grow very slowly this year, a senior government researcher said on Wednesday, reflecting official efforts to contain a potential fiscal mess.

The total amount of debt at these vehicles will reach 10 trillion yuan by the end of the year, up marginally from 9.76 trillion yuan at the end of 2009, Li Yang, vice president of the Chinese Academy of Social Sciences, said at a financial forum in Beijing.

Borrowing by local government financing vehicles exploded last year and about 26 percent of these loans are at serious risk of default, according to China's financial regulators.

Chinese local governments rely heavily on these vehicles to fund major investment projects, because they themselves are largely barred from issuing bonds.

"We hope the municipal bond market will see some development in the next five years," Li told the Bank of America-Merrill Lynch forum.

He also said it would take China some time to tilt its growth away from investment and towards more reliance on domestic consumption.

Investment will continue to be the main driver of economic expansion over the next five to 10 years, but capital spending will gradually shift toward the services sectors as well as industries that help to cut pollution, instead of big energy-guzzling infrastructure projects, Li added.

"China has a high investment ratio, but the savings rate is even higher," he said. "Given such a high savings rate, it's impossible to cut the investment ratio."