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Update 2 chinas wen govt debt risk controllable, sets reforms

* Premier Wen says nation's govt debt at controllable level* Vows economic management won't cause risks to financial system* Comments from speech to financial work conferenceBy Aileen Wang and Chris BuckleyBEIJING, Jan 30 China's Premier Wen Jiabao said the nation's government debt is at an "overall safe and controllable" level, that funding for key projects would be ensured and that applying the brakes to the problem would be done in a way to avoid systemic risks. Investors have been worried by the scale of the debts built up by China's local governments, which some fear could threaten the stability of the banking system. Wen's comments, reported in the official People's Daily on Monday, were made in a speech dating back to early January at the government's flagship financial work conference. Wen pledged to contain and defuse local government debt risks and avoid the spread of financial risks."Currently, our government debt is overall safe and controllable," he said."We are taking the issue of managing local government debt very seriously. Through clean-ups and regulation, the trend of expanding investment vehicles has been effectively contained."China's state audit office said earlier this month it had uncovered 530 billion yuan ($84 billion) worth of irregularities involving local government debt. But the figure is a fraction of the 2 trillion-3 trillion yuan of sour loans economists believe are buried in the 10.7 trillion yuan of debt local governments had at the end of 2010.

ACTIVELY, APPROPRIATELY EASE RISKS Wen said China "must both actively and appropriately ease financial and fiscal risks, and also ensure the funding needs of key construction projects approved by the government". But he warned against a simplistic approach to local government investment."We cannot simplistically hit the brakes and use a one-size-fits-all approach, and must avoid turning localised risks into comprehensive, systemic risks," he said. Wen also urged greater attention and controls on systemically important financial institutions.

"We must study standards for determination and a framework for assessing our country's systemically important financial institutions, and we must adopt more stringent oversight standards towards these institutions, enhancing external constraints on them," he said. Wen also vowed to "break monopolies" against private capital participation in the financial sector, promising broad reforms to ownership and capital structures in banking, equities, insurance and other financial institutions that would encourage more private capital to flow into the financial services sector."Improving financial services for small businesses requires the reform, innovation and regulated development of financial institutions that come in different types and different sizes," he said, making clear there was a role for private credit in the economy, providing it was properly regulated. In addition, Wen made the case for more market-based reforms to interest rates and credit pricing to enhance their roles, along with exchange rates, as price levers. Wen said China should "accelerate nurturing of a market system for benchmark interest rates, guide financial institutions towards enhancing their risk price-setting capacities, and steadily advance marketising reform of interest rates". And he repeated the long-standing commitment to "further improve the renminbi exchange rate formation mechanism, strengthen the flexibility of the renminbi exchange rate in both directions, maintaining a basically stable renminbi exchange rate at a reasonable and balanced level".

China would push forward with yuan convertability in an orderly manner and broaden the use of the currency in cross-boarder trade settlement, he added. And Wen reiterated that the government would further diversify its huge $3.18 trillion foreign exchange reserves."We should explore a multi-layer investment channel for our foreign exchange reserves and further improve the skill of managing the reserve assets by steadily diversifying the investment to maintain safety, liquidity and preserve and increase its value," he said. SUPPORT FOR ECONOMIC INNOVATION The Premier said China's financial institutions must step up support for key areas of economic structural adjustment, for projects aimed at saving energy and reducing pollution, and for indigenous innovation. Beijing has unveiled a slew of tax breaks to help cash-strapped small firms cope with rising costs and has also allowed them to issue more bonds and tap other sources of financing to ease the funding squeeze. China's big four state-backed lenders are criticised by small and medium-sized business owners for directing the bulk of their lending capacity to major state-owned enterprises. Bank lending in China is essentially rationed by the government, which sets an annual lending target and decides how much credit can be created in the economy. China has set a target of 8 trillion yuan ($1.27 trillion) in new local-currency bank loans and 14 percent growth in broad M2 money supply for 2012, three sources familiar with government plans told Reuters earlier this month. That marks a rise from 7.47 trillion yuan in new bank loans and annual M2 growth of 13.6 percent achieved in 2011, implying a further loosening of policy by the People's Bank of China to support the economy as growth loses steam and inflation cools.

Us climate finance in limbo, risking trust gap before paris

A looming federal budget confrontation and Republican hostility to UN global-warming talks threaten a U.S. down payment into a key climate-aid fund, money considered vital to a climate deal in Paris this December. President Barack Obama had requested $500 million in the 2016 budget for the first tranche of its $3 billion pledge into a UN-administered Green Climate Fund (GCF) that would help poorer countries make a transition to clean energy technologies and adapt to climate change. But Congressional Republicans have vowed to oppose that spending request, and the wider dispute between the President and Republicans over the federal budget has raised the possibility that Obama will not be able to guarantee that U.S. funding before the December summit. Some U.S. officials have started to warn island states and developing countries - among the fund's main potential beneficiaries - of the looming shortfall. The fund is seen as a down payment by rich countries toward a longer-term climate finance package that would total $100 billion a year by 2020, an amount that developing nations say is a condition for them to sign onto any deal in Paris that would reduce global carbon emissions. So far, 43 percent of the $10.2 billion pledged to the climate fund has not been fulfilled, with the United States responsible for most of that shortcoming."If there's not a firm commitment to financing, there will be no accord, because the countries of the (global) south will reject it," French President Francois Hollande said this month. A U.S. State Department official told Reuters that meeting its funding pledge is a "key administration priority" and said its ability to convert it into an actual contribution is "key to advancing U.S. interests globally.""We are working intensively with Congress to make this appropriation happen," the official said in a statement. But with just two months left before the Paris talks the funding faces stiff resistance.

The House of Representatives passed an appropriations bill this summer directly prohibiting the U.S. from funding the GCF. And an aide to the Senate environment committee aide told Reuters that Republican senators plan new legislation this fall requiring Congressional oversight for GCF funding."Climate finance is an under-riding element of the UN talks that can either further propel this agreement or undermine it completely," the aide said. "The finance issue is a direct hook for the Senate to get involved in the climate talks process."Republican Senator John Barrasso, chair of the Senate panel that oversees multilateral agreements, told Reuters he will push legislation to require any international aid related to climate change to require Congressional approval.

"It's hard to see an easy path to $500 million. It will be difficult, if not impossible, to have Congressional loose ends tied up by December," said Karen Orenstein, senior policy analyst at Friends of the Earth, an environmental advocacy group."This can shift a lot of the plates in the negotiations."TRUST GAP Tony de Brum, foreign minister of the Marshall Islands, said countries like his that will rely heavily on climate finance have no confidence that sum will be delivered.

"The fact that the United States - which originally put the $100 billion target on the table - is yet to make its own initial contribution to the GCF is a cause for concern," said de Brum. "This is a big, gaping trust gap that needs to be filled before Paris."Religious groups joined environmental organizations to press for Congress to approve the funding and have been lobbying since the August recess. Reverend Mitch Hescox of the Evangelical Environment Network said his group has met with Senate Republicans such as Lindsay Graham, Lamar Alexander and Bob Corker on key committees such as appropriations and foreign relations."We are working with Republicans in the Senate to show them this is a moral issue for us," Hescox said. "We are going to do all that we can to make sure these funds are appropriated and released."He said the group's outreach showed some success in July when Republican Senator Mark Kirk voted to support an amendment to the Senate Appropriations Committee bill that would allow the U.S. to contribute to the fund, reversing a prior prohibition. Developing countries warned U.S. officials not to use Congressional politics as an excuse for not living up to their financial commitments."The Americans always say: 'You know how hard it is for us to deal with Congress on the budget.'," said Ronny Jumeau, UN Ambassador of the Seychelles, a member of the Association of Small Island States negotiating bloc."Obama cannot come to Paris and not put money on the table. He's got to put his money where his mouth is," he said.