By Li Hongmei

China's central bank Governor Zhou Xiaochuan warned yesterday that about 20 percent of local government financing vehicles were not profitable and were vulnerable to risks.

Speaking on the sidelines of the annual session of the National People's Congress, Zhou said, "We should not underestimate risks in local government financing, nor should we overestimate them."

He said about 20 percent of local government financing vehicles were funding projects which were not profitable, adding that the debts would have to be paid with other incomes of local governments.

He said some of the local governments lacked proper financing channels when they launched projects. He said more attention must be paid to the risks involved and called for new financing tools to ensure financial support for the country's urbanization drive.

Zhou also pledged to further liberalize exchange rate and facilitate the use of yuan in cross-border trade and investment, a reform he has been committed to in the past decade.

"The need to make yuan convertible was written into policies in 1993. The yuan is already convertible in trade, and we will gradually make it convertible under capital accounts," Zhou said.

"Wider cross-border use of the yuan also requires speeding-up of liberalization."

Separately, Yi Gang, a vice central bank governor and head of the foreign exchange watchdog, said authorities may start a yuan currency swap in Taiwan to facilitate cross-Strait trade and investment.

Zhou also maintained that China will take a cautious approach on monetary policy, while remaining vigilant against consumer price hikes.

The country's monetary policy will remain prudent and neutral in 2013 and guard against inflation. He said policies to cool home prices will be strengthened in the future.

His remarks followed inflation fears after February's price gains reached a 10-month high of 3.2 percent, and home prices resumed an upper trend since the second half of last year.

"February's consumer price index reading of 3.2 percent is beyond expectations, indicating we should be on high alert for inflation," Zhou said. "We (the People's Bank of China) plan to stabilize consumer prices and inflationary outlook through monetary policies and other measures."

Zhou said that this year's official 13 percent growth target of M2, a broad measure of money supply, is smaller than the 14 percent targeted last year, which indicated that the government was less tolerant about consumer price rises.

The central bank may sometimes tighten structural monetary policies targeting the property market, such as down payment rates and special interests rates for housing loans, to help control home prices, Zhou indicated.

The State Council said on March 1 that cities where real estate prices had increased too fast may raise borrowing costs for second-home buyers.

It called for a strict implementation of the 20 percent capital gains tax on profits from housing sales.

Standard Chartered Bank researchers warned on Monday that China's consumer price inflation may reach 4 percent this year along with recovering economic growth and property transactions, forcing the central bank to raise interest rate in the fourth quarter to combat inflation.