Beijing: Chinese central bank Governor Zhou Xiaochuan said that local-government financing vehicles using land as collateral may pose risks for the nation's banks.
"When land prices rise, there may be over-valuation of land," Zhou said at a press briefing in Beijing on Friday. "In the future, if land prices fall, there may be a difference in the assessment of the loan."
China's local governments are raising funds through investment vehicles to circumvent regulations that prevent them borrowing directly. The extra borrowing, not counted in official calculations, could lead to debt rising to 96 percent of gross domestic product ratio next year and in "the worst case" trigger a financial crisis, Northwestern University Professor Victor Shih said last week.
Zhou said that while "many" local financing vehicles have the ability to repay, two types cause concern. One uses land as collateral, while the other can't fully repay borrowing, meaning that the local governments may be liable, leading to "fiscal risks".
The central bank will ensure lenders comply with regulations on evaluating loans, pricing risk and assessing the value of land, Zhou said, adding that they "should be prudent, meaning a bit conservative".