Bank lending to local government financing vehicles (LGFVs) coming due in the following two or three years is expected to reach 3.49 trillion yuan, posing dire challenges to risk control, said Chairman of China’s top regulator.

Shang Fulin, chairman of China Banking Regulatory Commission (CBRC), warned about increasing pressures on reining in LGFVs as this year's transitions in local government leadership could bring new investment incentives and financing demands.

LGFV loans stood at 9.3 trillion yuan at the end of 2012, 1.5 times the fiscal revenue reported by local governments for the year of 2012. 

Statistics showed LGFV loans totaling 1.8 trillion yuan and 1.2 trillion yuan will come due at the end of 2012 and 2013, respectively.

The risks exposed by those financing vehicles are basically under control, and are not likely to evolve into systematic risks, Communication Bank of China (CBC) chief economist Lian Ping said.

However, the biggest risk facing China’s economy is in the financial sector, said Yan Lining, professor at Peiking University, who warned over-lending that comes along with the country’s urbanization wave could lead to financial turbulences.

Risks of default are most likely happen to LGFVs at lower administrative levels, including smaller cities and counties, especially in less-developed western or central regions since governments at those places have more refrained revenue sources.  

Lian noted property prices in some of third or fourth tier cities, which are likely to go down amid cooling measures, will further squeeze fiscal revenue of their local governments.