Now Chinese Warnings About Defaults in China

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China Daily reports that local governments in China had an overall debt of 10.7 trillion yuan, or about a staggering USD $1.65 trillion, by the end of 2010. These figures came from China's top auditor on Monday, in a report to the National People's Congress, in which he also warned that some were at risk of defaulting on payments.

"It was the first time the world's second-largest economy publicly announced the size of its local governments' debts. The scale amounts to more than one-quarter of its GDP in 2010, which stood at 39.8 trillion yuan".

"Concerns are rising that the problem of local government debt could destabilize the financial system of the country if it is not managed properly, especially after the central government's tightening of the housing market, which could affect local fiscal revenue that is highly dependent on land sales and make debt repayment more difficult.

In addition, China's ambitious plan to construct 36 million affordable homes during the coming five years, including 10 million in 2011 and 10 million in 2012, added to worries about increasing capital tension and rising non-performing loans in commercial banks".

"Fitch Inc, a major international rating institution, lowered its outlook of China's long-term local-currency rating to "negative" from "stable" in April, saying there is a "high likelihood of a significant deterioration" in banks' asset quality within three years.

Bad loans could rise to between 15 and 30 percent of the total, with concern about the quality of lending compounded by growth in off-balance-sheet credit, Bloomberg cited Fitch as saying".