China Said to Propose Limits on Local Government Loans

China Banking Regulatory Commission Former Chairman Liu Mingkang
Liu Mingkang, former chairman of the China Banking Regulatory Commission (CBRC), . Photographer: Nelson Ching/Bloomberg

China’s banking regulator proposed keeping a cap on local government loans to curtail defaults while encouraging funding for railways, roads and affordable homes, a person with direct knowledge of the matter said.

The China Banking Regulatory Commission suggested limiting loans to local government financing vehicles to levels reached at the end of 2011, according to a person with knowledge of the matter who asked not to be named because the proposal is confidential. The watchdog made the recommendation in a report sent to the cabinet after Premier Wen Jiabao’s call last month for the government to focus on growth, the person said.

China is introducing stimulus measures to arrest a slowdown in the world’s second-biggest economy while enforcing risk controls. Bad debts rose for a second straight quarter for the first time since 2005 and banks’ earnings growth slowed in the three months to March 31, as steps to curb inflation pushed up funding costs and drove down property prices.

The CBRC’s proposal, which includes about 10 points and was submitted to the State Council, China’s cabinet, at the end of May, encourages banks to boost lending for “key” construction projects, toll roads, agriculture, export financing, consumer credit and small businesses, the person said. The regulator didn’t specify targets, the person said.

A Beijing-based press officer for the CBRC declined to immediately comment.

Faltering Economy

China’s economy expanded 8.1 percent in the first quarter, the slowest pace in almost three years, as Europe’s debt crisis crimped exports and policy makers’ measures to cool consumer and property prices damped domestic demand. That led the central bank to cut interest rates on June 7 for the first time since 2008, and the government delayed more stringent bank capital rules for one year to help bolster credit growth.

Premier Wen on May 20 called for “putting stabilizing growth in a more important position.” The change of rhetoric spurred speculation about a government stimulus similar to the 4 trillion-yuan ($628 billion) program unleashed during the 2008 credit crunch, which prompted a surge in local government borrowing and spurred concern that defaults would rise.

China’s new lending in May exceeded analysts’ estimates, aiding Wen’s efforts to reverse a slowdown in the country’s economic growth. Local-currency loans were 793.2 billion yuan, the People’s Bank of China said on its website on June 11. That compared with the 700 billion yuan median forecast in a Bloomberg News survey of 29 economists and 681.8 billion yuan in April.

Local Borrowing

The local governments, prohibited from directly taking bank loans, had set up more than 6,000 financing companies to raise funds for projects such as stadiums, roads and bridges, the National Audit Office said in a report last year. Their bank borrowings totaled 9 trillion yuan as of Dec. 31, with about one-third coming due in the next three years, a person with knowledge of the matter said in March, citing CBRC data.

China’s top economic planning agency ordered local governments to examine the ability of companies to repay bonds maturing in 2012 and 2013, two people with direct knowledge of the matter had said earlier this week, asking not to be identified as they weren’t authorized to speak to media.

Cash Flows

While CBRC’s new rules would cap total lending levels, banks would be allowed to refinance loans to the local government financing vehicles for completed projects that aren’t generating income if estimated future cash flows can cover payments, the person said. The amount for such refinancing may not exceed the value of the original loan, the person said.

“This is a prudent risk-management measure,” Stanley Li, a Hong Kong-based analyst at Mirae Asset Securities (HK) Ltd., said by phone today. “LGFV loans can still be risky. People still remember the side effects of the previous stimulus package. CBRC will continue to request banks to be disciplined in lending unless the economy turns really bad.”

Banks may also be allowed to revise repayment arrangements for the financing vehicles if the loans mature before the projects are completed, the person said. Last year, the CBRC hadn’t yet formulated refinancing rules and was urging banks to not roll over any such loans, the person said.

Banks can exceed a debt-concentration rule in lending to railway projects this year if their risk controls permit, the person said, without elaborating. Under Chinese rules, a bank’s total credit to its biggest customer can’t exceed 15 percent of the lender’s net capital, a requirement they should “firmly” abide by, then-Chairman Liu Mingkang said in an April 2011 statement on the regulator’s website.

The most recent proposal also aims to encourage lenders to prioritize mortgages for buyers of affordable housing and smaller, lower-priced homes, the person said. Home values fell in a record 54 of 70 cities in May as developers cut prices to boost sales, the statistics bureau said this month.

— With assistance by John Liu

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