China's local governments may have trouble paying off debts as the property market sees a downturn in revenue, according to global ratings agency Chengxin International Credit Rating Co. Ltd.

The ratings agency said that land sales comprise majority of local governments' revenue. Last year, more than 51 percent of local units' net revenue was from real estate-related income such as property taxes.

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A major concern for the debt repayment lies in local government projections that a bulk of land sales will be used to pay off the debts, said China Chengxin analyst Yan Wentao.

"The sagging property market will certainly weaken LFGVs' (local government financing vehicles) balance sheets as the largest asset for them is land. Most LFGVs rely on land as collateral to secure bank loans."

A number of provinces have declared high ratios for land sale revenue repayment. In 2012, the average ratio was 12 percent. However, provice like Zhejiang had projected a 66 percent ratio, China Daily has learned.

The local real estate market has seen a decrease in activity especially in May where property revenues dropped 38 percent across 300 cities compared to last year, according to the research institute China Index Academy.

Now, pressure has mounted for local government units to repay an outstanding debt of at least 4.24 trillion yuan, roughly equivalent to US$678.8 billion, set to mature in 2014 and 2015. Moreover, local governments are finding it harder to allocate their debt payment budgets because of the mounting need to prop the economy's development.

The Ministry of Finance revealed that local government spending rose to about 27 percent last month compared to expenditure spending of 9.6 percent in the first four months.

Nevertheless, Yan pointed out that debt regulators had eased repayment terms by extending debt roll over and maturity. The Ministry of Finance has also made reforms to reduce debt costs by allowing cities to sell bonds under their own names. The program is expected to be implemented nationwide. Ten cities have already been initially approved to implement this program.

TagsChina debt, Chinese debt, local government, finance, real estate, property market, land market, Yan Wentao, Chengxin, Ministry of Finance