China Development Bank Proposes Taking on Sole Local-Lender Role

China Development Bank Corp., the nation’s largest policy lender, is proposing to become the sole financier to local governments as mounting debt threatens efforts to promote urbanization.

The evaluation of loans, extension of credit and debt servicing to the nation’s towns and cities should be centralized under CDB or another bank chosen through bidding, Hu Huaibang, chairman of the policy lender, wrote in the official Qiushi magazine. Tackling the problem of local-government debt is necessary to help promote urbanization, he wrote.

Premier Li Keqiang has already been relying on China’s so-called superbank to finance the construction of affordable homes for workers who’ve moved from the countryside to cities in numbers double the population of Japan. Concern about local liabilities that have swelled to 17.9 trillion yuan ($2.95 trillion) has added to record borrowing costs as investors speculate defaults may spread.

“This is an interesting and welcome proposal to get a grip of the explosive growth of local government obligations,” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole SA, wrote in a research note. “Given that CDB is a 100 percent government-owned policy bank, this would streamline management of local debt and help contain it, as well as put central government guarantee behind all forms of local government loan-based obligations, likely including LGFV debt.”

Debt Audit

Local-government debt jumped 67 percent as of June from 10.7 trillion yuan at the end of 2010, according to data compiled by the National Audit Office. CDB extended 116.6 billion yuan of new loans to affordable-housing projects in 2012, accounting for more than 60 percent of the total lent by the nation’s banks to such projects.

Local financing units must repay a record 299.5 billion yuan of bonds this year, according to Everbright Securities Co., the most since it started compiling the data in 2000 and up 56 percent from 2013.

Finance Minister Lou Jiwei wrote in an article in November that China’s medium-to-long-term fiscal situation faces serious challenges. Some local-government debt is beyond the capacity for repayment and some overdue debt has emerged, he said.

Aggregate financing, the broadest measure of credit, was 2.58 trillion yuan ($425 billion), the People’s Bank of China said in a Feb. 15 statement. New local-currency lending was 1.32 trillion yuan, the highest level since 2010. Trust loans, under scrutiny because of default risks, were about half the level of a year earlier.

Bond Market News: TOP BON

— With assistance by Judy Chen

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