China Banking Regulator Steps Up Risk Controls on Local Government Loans

China’s banking regulator said it will step up oversight of local government financing vehicle loans and property-related credit in the nation’s smaller cities in the second half of this year.

Banks should control the risks of new loans tied to the financing vehicles through “strategic cooperation” with local governments, stronger management of land-backed lending and accurately assigning risk-weightings based on actual cash coverage of projects, the regulator said. The statement posted on the China Banking Regulatory Commission’s website yesterday cited a speech by Chairman Liu Mingkang.

China’s first audit of local government debt found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of last year, 79 percent of which were bank loans, the National Audit Office said last month. As much as 30 percent of the local government financing vehicles’ loans may fail and become the biggest contributor to banks’ bad debts, ratings agency Standard & Poor’s has said.

“A clean-up of the local government debt is likely to require some combination of a bailout by the central government and bank write-offs over the next several years,” economists led by Banco Bilbao Vizcaya Argentaria SA’s Alicia Garcia Herrero said in a note to clients today.

Lack of Information

China can avoid and eliminate an “outburst” of risks tied to local debt, Jia Kang, head of the finance ministry’s research institute, wrote in a commentary published in the overseas edition of the People’s Daily today.

It was difficult to regulate local government debt in the past due to lack of transparency, Jia said. The findings by the country’s auditor provided a complete picture, enabling different government departments to liaise in controlling risks of such debt, he wrote.

A measure tracking property stocks on the Shanghai Composite Index lost 1.7 percent to close at a one-month low.

The banking regulator said it will also strengthen its oversight on property lending, particularly risks in real estate in so-called second and third-tier cities, without elaborating which areas are covered by those categories.

The Chinese government is increasing efforts to curb the growth in residential prices in smaller cities after limiting home purchases in Beijing and Shanghai. The State Council said last week that second and third-tier cities that have seen excessive price gains should restrict the number of homes each family is allowed to buy.

Still, the CBRC asked banks to “actively support” the construction of public housing and boost lending to small-sized enterprises, according to the statement.

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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