China Regulators, Officials Aim to Ease Local Finance Vehicle Loan Concern
China has more than 1,000 county-level governments
Simon Dawson/Pool/Bloomberg
China's finance minister Xie Xuren.
China's finance minister Xie Xuren. Photographer: Simon Dawson/Pool/Bloomberg
China’s banking regulator tried to ease concern over risks from bank lending to local government financing vehicles, saying such loans won’t necessarily go bad.
The China Banking Regulatory Commission said in a statement that risks can be contained through measures to secure repayment. Such loans are typically backed by collateral and guarantees, it said today. Separately, Finance Minister Xie Xuren said local governments should improve their financial management.
Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) lent to finance local infrastructure projects, according to a person with knowledge of data collected by the CBRC. The estimate implies about $260 billion of debt may go sour, almost five times the amount the nation’s five largest banks are raising to replenish capital.
“We should assume the real problem is worse than the initial evaluation,” said Michael Pettis, a finance professor at Peking University in Beijing and former head of emerging markets at Bear Stearns & Cos. in e-mailed comments today. “And there is likely to be more to come.”
Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.
‘Strong Impulse’
China has more than 1,000 county-level governments and hundreds of city and municipal councils that receive revenue from local taxes, land sales and central-government transfers. Many tapped banks during China’s credit-fueled stimulus last year.
“Local government at all levels need financing,” Dagong Global Credit Rating Co. Chairman Guan Jianzhong said in a Bloomberg Television interview yesterday. “They have a very strong impulse to borrow. As issuers, they will do everything they can to hide the risks. In order to reveal those risks, we need a good credit-ratings system.”
Credit ratings assigned to yuan-denominated bonds issued on behalf of local government-backed companies in China don’t reflect risks investors face, Guan said.
Finance Minister Xie said local governments should improve their budgets with better planning and regulation, according to a statement on the Ministry of Finance website.
“Right now China’s commercial banks have adequate provisions and they have good capability to control risks,” the banking regulator said in the statement.
‘Serious Risks’
The regulator, led by Chairman Liu Mingkang, said today loans that have been described in media reports as having “serious repayment risks” won’t necessarily become non- performing. The watchdog didn’t name the media reports.
CBRC’s Liu said last week borrowing by local government financing vehicles may threaten the banking industry.
Only 27 percent of loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person with knowledge of data collected by the CBRC said.
--Henry Sanderson, with assistance by Kevin Hamlin in Beijing. Editors: Joost Akkermans, Tom Kohn
To contact the reporter on this story: Henry Sanderson
Rate this Page