China Said to Warn Banks as Local Officials Seek New Loans
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Nelson Ching/Bloomberg
The China Banking Regulatory Commission told lenders earlier this month to be on watch for loan applications for new programs disguised as funding requests for unfinished ones, said the person, declining to be identified as the order isn’t public.
The China Banking Regulatory Commission told lenders earlier this month to be on watch for loan applications for new programs disguised as funding requests for unfinished ones, said the person, declining to be identified as the order isn’t public. Photographer: Nelson Ching/Bloomberg
China warned its banks to resist demand for credit from local governments as new officials in cities, towns and villages pursue projects that bolster growth, a person with knowledge of the matter said.
The China Banking Regulatory Commission (CBRZ) told lenders earlier this month to be on watch for loan applications for new programs disguised as funding requests for unfinished ones, said the person, declining to be identified as the order isn’t public. Requests may increase as local leaders appointed in a nationwide shuffle seek funds to help create jobs in their regions, the person said.
The order to reinforce lending limits reflects the central government’s intention to continue a two-year campaign to rein in local borrowing. China’s efforts to curtail these loans on concern defaults may mount as the economy slows has boosted borrowing costs for local governments as their financing vehicles are forced to raise funds by selling bonds.
“The central government definitely needs to keep local officials’ expansion plans in check to prevent the situation from deteriorating,” Shen Jianguang, the chief Greater China economist at Mizuho Securities Asia Ltd. in Hong Kong, said by phone today. “The local chiefs’ promotions hinge on the economic growth in those areas.”
A press official at the banking regulator, who declined to be identified because of the agency’s rules, said he couldn’t immediately comment.
Jockeying for Power
The ruling Communist Party’s local committees began the appointment of new leadership at the provincial, county, town and city levels in 2011 as part of a shuffle that takes place every five years. These changes will culminate with President Hu Jintao and Premier Wen Jiabao stepping down from their party positions at a meeting scheduled for the end of this year.
New officials will probably try to push ahead on fresh projects to create jobs in their regions and secure better positions in the party and the government, Sun Peng, a Beijing- based analyst at Bank of China International, said by phone. That would increase the risk of defaults on local-government loans as the officials may fail to make payments on existing obligations, he said.
Local governments in China, prohibited from directly taking bank loans or selling bonds, have set up more than 6,000 financing companies to sidestep those rules and raise funds for building stadiums, roads and bridges, the National Audit Office said in a June report. It also warned of repayment risks.
Economic Slowdown
China yesterday released data that showed the economy expanded in the fourth quarter at the slowest pace in more than two years as Europe’s debt crisis curbed demand for exports and the property market was weakened by measures to rein in home prices. The nation’s benchmark Shanghai Composite Index (SHCOMP) rose that day by the most since October 2009 on expectations the government will ease monetary policy to ensure economic growth.
Premier Wen pledged this month to preserve growth and said the nation wouldn’t “stand still” in the face of difficult conditions. The central bank in December cut the reserve requirement for banks for the first time since 2008.
China’s central bank will let the nation’s five biggest lenders increase first-quarter lending by a maximum of about 5 percent from a year earlier, according to two people at state lenders who have knowledge of the matter. The central bank won’t comment on anything relating to credit quotas, a press official said in Beijing today.
Trimming Local Debt
The banking regulator began warning lenders in 2010 to limit credit to the financing vehicles set up by the local governments and to seek early repayment on some outstanding loans. As a result, total outstanding credit to the financing vehicles, based on classifications set by the regulator, was cut to 9.1 trillion yuan ($1.4 trillion) in the three months ended Sept. 30 from 9.2 trillion yuan, the person said.
Of that total, about 2.9 trillion yuan is now being managed as ordinary corporate loans, the person said. Banks are able to reclassify loans to local government financing vehicles as ordinary corporate loans when they have stable operating cash flows, are determined by the lender to have the ability to fully repay debt and otherwise function like a normal commercial company, China’s State Council said in August 2010.
Illicit Guarantees
Banks were also told to reject illicit guarantees or commitments offered to secure the financing, the person said.
The lenders were told to ensure funding for key projects that have already been approved, the person said. Shang Fulin, head of the banking regulator, told the official Xinhua News Agency in an interview this month that the commission would ensure funding demand for the construction of affordable housing is “reasonably met.”
With their access to bank loans limited, the financing vehicles have turned to the nation’s bond market. Such issuers raised 61.8 billion yuan selling debt in the year to March 24, a third more than was raised by local government financing vehicles a year earlier, Bloomberg data shows.
Policy makers in China are testing allowing local governments to sell bonds. The cities of Shanghai and Shenzhen, as well as the provinces of Zhejiang and Guangdong, will be able to sell debt under a pilot program, the Finance Ministry said on Oct. 20.
The market for regional authorities’ debt, which hasn’t existed since the Communist Party took power in 1949, will require issuers to publish annual reports. The rules will also stipulate clearer obligations for the bond issuers than for the companies set up by local governments to raise money for sewers, bridges and toll roads.
To contact Bloomberg News staff for this story: John Liu in Beijing at jliu42@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
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