China details local debt rollover plan China's banking regulator has issued guidelines telling banks how to roll over the loans issued to local governments in recent years, local media has reported. The move, which is aimed at averting a wave of defaults that could have dealt a harsh blow to the Chinese economy, provides detail on how a plan, reported in the Financial Times last month, will be implemented. China Business News, a financial newspaper, said banks would be expected to present reports on how they will address local government loans that are maturing this year before the end of April. The loans to local governments amount to Rmb9.1tn ($1.4tn), or almost a quarter of China's gross domestic product. Most were issued during the global financial crisis, when Beijing called on its banks to pump out loans to fuel the economy's recovery. About 35 per cent of the loans to local governments are due over the next three years, but many of them went to infrastructure investments that have not yet started to generate revenues, raising the risk of defaults. China's official debt burden is very low by international standards, at less than 20 per cent of GDP. But this understates the true debt level, since it only counts central government debt and overlooks the local debts as well as other liabilities, such as borrowing by the railway ministry. By devising a plan to clean up the local government debts, the government has in effect acknowledged that the problem is more serious than the official figures suggest, but it has also taken a step that analysts believe is needed to prevent bigger financial troubles down the road. To get around regulatory restrictions on government debt, the loans to local authorities were issued to government-backed investment vehicles. The banking regulator has now divided these loans into five different categories, China Business News reported. The first three are for vehicles that have existing cash flows and have completed or are close to completing their investment projects. These vehicles should be allowed to obtain refinancing, though in some cases the maturity extensions will be a one-off deal. The fourth are those that do not have sufficient cash flows but whose projects can attract private investment. Arrangements should be made with banks to delay repayments so that investors can be brought on board, the regulator said. The fifth and final are the most problematic: those that have insufficient cash flows and have little prospect of attracting private investors. Loan rollovers in these cases will not be permitted. Instead, local government will be expected to stand behind the troubled projects to repay the original loans in instalments. The report gave no breakdown of what percentage of local government loans fell under the various categories. Along with trying to reduce the mountain of debt that was accumulated during the global financial crisis, Beijing has hit the brakes on new lending to the local government financing vehicles. Premier Wen Jiabao said last week that local government debts increased by Rmb300m last year, a fraction of their total outstanding debt pile, which includes bonds as well as the loans from banks, of nearly Rmb11tn.