Outstanding local government debt in China is likely to have topped 12.1 trillion yuan ($1.97 trillion) as of the end of 2012, or 23.3% of gross domestic product, HSBC says in its First Light Asia report dated June 17, 2013.

The bank says the estimate is based on the results recently released by the State Audit Office that outstanding local government debt in 36 provincial or prefectural governments grew 12.9% from 2010 through 2012, or at an annualized rate of 6.3%.

Bank loans remained the largest source of funding, representing 78.1% of the total in 2012. Bonds played an increasingly important role in funding local government spending, accounting for 12.1% of the total, up from 7.1% in 2010. HSBC expects considerable potential to grow further.

In 2012, 92% of the borrowing went to transportation, infrastructure, land reserve, healthcare, agriculture, environmental protection and public housing construction.

This painted a similar picture to 2010, when more than 90% of local debt was used to fund similar long-term infrastructure projects. Therefore, there was no big change in the composition, and possibly quality, of local government balance sheets.

The 36 local governments were responsible for repayment or guaranteeing repayment of 71.5% of the 3.8 trillion yuan worth of outstanding debt due in 2012, down from 84.4% in 2010.

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