China Eased Curbs on Local Borrowing, Securities Journal Says

China has relaxed lending curbs on local government financing vehicles to help prevent default risks as the peak period for loan repayments approaches, the China Securities Journal reported today, citing unidentified participants in a meeting held by the banking regulator.

Banks can continue providing credit to such companies to complete projects already started, buy land reserves and build roads, the paper said. Previously only social housing projects could apply for new loans, the report said. Phone calls by Bloomberg News to the China Banking Regulatory Commission press office weren’t answered.

Allowing new loans and rolling over of old debt may help local government financing vehicles cope with a liquidity crunch as they spend money building infrastructure projects that won’t generate income immediately to cover repayments. Seventy percent of the 10.7 trillion yuan ($1.7 trillion) of debt local-authority companies racked up by the end of 2010 falls due by 2015, according to the National Audit Office.

“It’s necessary to correct the mismatch between the financing tools and the underlying projects” such as allowing a temporary extension of loans, Helen Qiao, Morgan Stanley’s chief economist for Greater China, said at a briefing in Beijing yesterday. The risks won’t be “huge” as long as economic growth is kept stable in the “long run,” she said.

Complete Projects

Banks can also continue providing credit to local government financing vehicles to complete projects that are already more than 60-percent finished, the paper reported.

Many companies set up by local governments to build infrastructure took out loans that mature within one to five years while the projects themselves may only generate returns in 15 or 20 years, according to bond prospectuses.

The documents show some of China’s biggest provincial borrowers are delaying debt repayments, Bloomberg News reported in December. The Financial Times reported on Feb. 13 that regulators have told banks to roll over loans to local governments.

Some loan contracts and payment methods will have to be amended and some loans extended, the China Securities Journal reported today, citing an unidentified person close to the banking regulator.

Cash Flow Issue

UBS economist Wang Tao in Hong Kong said in a Feb. 14 note the “the most feasible solution” is to roll over the maturing bank loans until the borrower can repay the principal as the issue is “about cash flow, not solvency.”

Many “unviable” projects may have been approved during the rapid debt accumulation by local governments and bad loans may eventually account for 20 percent to 30 percent of the outstanding local-government borrowing from banks, Wang estimates. These debts may be restructured and written off gradually over the next few years, she said.

Local governments in China, prohibited from directly taking bank loans or selling bonds, set up more than 6,000 financing companies to sidestep those rules and raise funds for building stadiums, roads and bridges, the audit office said in a June report. The government’s 4 trillion yuan stimulus program introduced amid the 2008 global financial crisis spurred unprecedented levels of bank lending and increased risks that some of the assets may sour.

Premier Wen Jiabao pledged last year to clean up surging local government debt. The National Audit Office said on Jan. 4 that local authorities had cleared up about half the 531 billion yuan of debts that were found to have irregularities.

— With assistance by Victoria Ruan

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