China's debt risk within control

China has attached high attention on government debt and risks in this area are generally within control, Premier Li Keqiang said at a press conference on Thursday. Citing an official audit of government debts last year, Li said the country's debt-to-GDP ratio is still below the internationally recognized warning line. China's mounting government debt is considered as a latent danger to financial stability, and the country has started to take steps to address the issue. After two months of nationwide audits, the National Audit Office disclosed that governments at various levels were liable for a total direct debt of 20.7 trillion yuan (3.4 trillion U.S. dollars) at the end of June, up 8.6 percent, or 1.63 trillion yuan, since the end of 2012. While the level is within control, Li cautioned that the problem should not be overlooked, promising to take further regulatory steps, including putting the debt under budgetary management, to strengthen oversight. In China, local governments are not legally allowed to borrow funds on their own. The fiscal funds they receive from the central government and other sources of revenue, such as taxes, cannot meet their funding needs either, forcing them to use back-door approaches for funding that involves state-owned firms and local government financing vehicles. "We will keep the front open and block side doors," Li stressed at the press conference following the conclusion of the annual legislative session. His comments on Thursday followed reform plans unveiled in his government work report last week to overhaul the current financing scheme for local governments. "We will establish a standard financing mechanism for local governments to issue bonds and place local government debt under budgetary management," said the government report delivered by Li at the opening of the annual session of the National People's Congress. To guard against and defuse debt risks, China will also implement a comprehensive government financial reporting system, according to the report. The premier also said Thursday that authorities has set a timetable for implementing the Basel III accord in tightening regulative measures over shadow banking. Regarding the defaults of financial products, Li said avoiding a few individual cases would be difficult, but efforts must be taken to make sure regional and systemic financial risks do not occur.