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CDB Says Banks Shouldn’t Cut Off China Local Government Finance

China Development Bank Corp., the largest lender to the country’s local government financing vehicles, said creditors shouldn’t be forced to cut off funding to the companies, causing them to interrupt projects.

The vehicles, set up by local governments to sidestep rules barring them from directly taking bank loans or selling bonds, had accumulated 10.7 trillion yuan of debt at the end of 2010, with 70 percent of the borrowings due for repayment by 2015, the National Audit Office said in June. China Development Bank’s loans to these companies exceed 2 trillion yuan, Vice President Wang Yongsheng said in an interview today.

“The local government financing platforms aren’t designed for one-off deals” and China Development bank has “set rather long terms,” Wang said. “A project, if stopped halfway, would become a problem.”

China has tightened control on lending to local financing vehicles on concerns some will be unable to pay their debt as economic growth slows, saddling the nation’s banks with bad loans. Premier Wen Jiabao, in his annual state-of-the-nation address to the National People’s Congress, said today the central government will control the level of new local debt, including setting up an early-warning system on leverage.

Local projects financed by loans from China Development Bank have performed well, Wang said. It has “almost no bad loans” from extending credit to local governments, he said.

Bank of China Ltd. Chairman Xiao Gang echoed Wang’s comments. Xiao said the non-performing loans ratio for its lending to local governments was less than 1 percent. Many of the local government finance vehicles used their funds for infrastructure and many of these projects are good assets, he told reporters in Beijing today.

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