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China Eyes Modest Recovery, Rising Risks: Vice FinMin

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China faces rising risks in its banking sector and pressure on government revenue in 2013 while economic recovery could be hampered by weak external demand and domestic constraints, Vice Finance Minister Li Yong said in comments published on Wednesday.

The government will channel more bank credit into cash-starved smaller companies and the farm sector in 2013 to step up support for the real economy, Li said in a speech posted on his ministry's website.

(Read more: US-Style Credit Crunch for China?)

"The potential risks in the financial sector have increased. China's banking assets have been growing rapidly in recent years, with bank loans climbing to new highs," Li said.

"The vast majority of such bank loans have yet to be tested by the full economic cycle and the potential risk is especially high in the real estate and related industries, as well as local financing vehicles due to risks in mismatched maturity."

Government revenues also face downward pressure due to falling corporate earnings and tax cuts, Li added. Fiscal revenues rose 11.9 percent year-on-year in the first 11 months of 2012, down by 14.9 percentage points from the same period last year.

China's economy had shown signs of modest recovery in the fourth quarter but global demand remained tepid and Europe still needed deeper reforms to revive growth while the full recovery of the U.S. economy could take time, Li said.

(Read more: China to Keep Steady Policies, Deepen Reforms in 2013)

Trade protectionism targeting China is rising due to the grim global economic picture and high unemployment, Li said.

China is on course to end 2012 with the slowest full year of growth since 1999 and while the 7.7 percent rate forecast in a benchmark Reuters poll is above the world's other major economies, it is well below the roughly 10 percent annual growth seen for most of the last 30 years.

The government has relied on gentle policy easing to support growth, studiously avoiding any hint of repeating the 4 trillion yuan ($640 billion) stimulus launched in 2008 that saddled local governments with mountains of debt.

"From the long-term perspective, the slowdown in China's potential growth rate will not change," Li said, adding that the country was shifting to a period of modest growth from the 10 percent-plus average growth recorded between 2002-2007.

The slowdown was mainly caused by the diminishing dividends from China's accession into the World Trade Organisation and from the surplus labor, Li added, echoing the view held by Chinese academics and officials.

China faces a tough job to boost consumption to underpin growth due to unstable rural income and, the lack of social security and sound infrastructure in the countryside, Li added.

(Read more: Why China's Future Growth Hinges on Its Megacities)