PBOC says alert to systemic stability risks

China will make every effort to prevent systematic or regional risks to financial stability in 2012, the central bank said in a statement published on Thursday.

The People's Bank of China (PBOC) pledge came as China's state-directed banking system attempts to clean up $1.7 trillion in debts amassed by local governments and address risks lurking in the country's underground system of private lending.

Liu Shiyu, a PBOC vice governor, said in the statement that China would pay close attention to risks in local banks, non-bank financial institutions and private lending in 2012.

"The financial stability situation will become more grim (in 2012 than 2011), and the tasks more arduous," Liu said in the statement, which provided a summary of PBOC's recent working conference on financial stability.

Banking watchdog, the China Banking Regulatory Commission (CBRC), has ordered lenders to re-assess their exposure to local government borrowing by the end of March and said it would allow a one-time rollover of problem loans identified, restricting any maturity extensions granted to a maximum of five years.

China's mountain of local debt piled up after the 2008/09 global financial crisis when Beijing ordered local governments to spend massively on infrastructure projects to buoy economic growth, which they did by borrowing heavily.

China's audit office put the total value of local government debt at 10.7 trillion yuan ($1.7 trillion) at the end of 2010 with 41.7 percent of the outstanding debt due to mature by the end of 2012.

The national audit office also said that it had uncovered irregularities on local government loans worth 530 billion yuan, citing a litany of bad practice.

Analysts reckon about 2-3 trillion of the loans may be sour.

"We must further enhance of analysis and study of key areas and hot spots regarding financial stability," Liu said, without elaborating on what the hot spots might be.

Underground financing is widely seen by analysts as a problem area, especially after a 2011 scandal that saw private entrepreneurs in Wenzhou, Zhejiang province, flee into hiding to escape loan sharks they had borrowed from after being unable to secure credit from China's big state-backed banks.

The public outcry prompted urgent government intervention and saw Premier Wen Jiabao tour Wenzhou last autumn at the scandal's height, promising to ensure the right policy mix in future to support access to credit and economic growth.

Analysts also expect defaults by real estate trust investment vehicles, hurt by a combination of falling real estate prices and an inability to access funds to refinance in the wake of a government-backed clampdown on property lending designed to curb rampant real estate speculation.