China's financial stability might be compromised if the railway ministry's considerable liabilities, especially those issued by banks, are not well managed, said banking officials and executives on Sunday.

Yi Gang, deputy governor of the central bank, said authorities must handle existing railway loans and bonds properly as the government splits the railway ministry into two organizations.

The administrative portion will be called the State Railway Administration and placed under the Ministry of Transportation, according to a report delivered to the National People's Congress on Sunday. It added that the railway ministry's commercial operations portion will be spun off as a new company called China Railway Corp.

"The railway construction loans involve many banks at the national and local levels. During the reform process, the government must make clear who is responsible for the debt."

Yi said bond financing has been an important source of funding for railway construction.

The ministry is China's biggest issuer of corporate notes. It sold bonds worth a total of 164 billion yuan ($26.4 billion) in 2012 to support development of the country's rail network, which is expected to reach 120,000 km by the end of 2015.

"Although the institutions will change, China's railway construction is still rapidly developing. Therefore, the government must assuage the concerns of financial institutions, market players, credit rating agencies and the public by addressing the financing issues," Yi said.

He made the remarks during a group discussion of the annual Chinese People's Political Consultative Conference.

According to a financial report from the Ministry of Railway, liabilities stood at 2.66 trillion yuan by the end of September against total assets of 4.3 trillion yuan.

The debt load is larger than Denmark's economy, Bloomberg reported.

Zhang Jianguo, president of the China Construction Bank Corp, said among the ministry's liabilities, nearly 2 trillion yuan were from bank loans.

"The question facing the loans is who will assume the debt - the administrative or the commercial spin off. In addition, dealing with the credit cards issued to the ministry's 2 million employees and their pension funds could also become a thorny issue."

Zhang said the government must keep close watch over the debts to guarantee the stability of the financial market.

Borrowing costs for the ministry fell to a 7-month low at end of February amid speculation the ministry would merge with the transportation ministry, according to data compiled by Bloomberg.

Minister of Railways Sheng Guangzu said on Sunday that the government will analyze the ministry's liabilities and deal with them "seriously and appropriately", adding the debt might be separated into two categories based on public or commercial use.

The report to the NPC said China will continue to support railway construction and development, as well as accelerate investment and fundraising and pricing reform.

Rampant lending by banks to finance construction of railway, highway, and other infrastructure after 2008 has been regarded by banking regulators as a major source of systemic risk. Industry analysts have suggested that the concerns have caused regulators to exercise tighter control over new lending, even though demand has been rising.

Liu Mingkang, former chairman of the China Banking Regulatory Commission, said unpaid debts and rollover loans by banks could pose a threat to the country's financial system.

China's new yuan-denominated lending fell to 620 billion yuan in February from 1.07 trillion yuan in January, according to data released by the People's Bank of China on Sunday.

Growth of the M2 money supply, a broad measure that covers all deposits and cash in circulation, slowed down by 0.7 percentage point to 15.2 percent.

Total social financing, which includes loans, bonds, and stock sales, stood at 1.07 trillion yuan in February, compared with 2.54 trillion yuan in January.

wangxiaotian@chinadaily.com.cn