Loan guidance is good for banks, report says

China's guidance on local government loans is good for banks, said Moody's Investors Service in a report on Monday.

"The new guidance takes a more systemic approach to identifying and monitoring banks' local government financial vehicles (LGFV).

"We expect it to strengthen control of LFGV-related risks within banks and improve regulatory monitoring of the loans' risk system-wide," said Katie Chen, an analyst at the international rating agency.

Last week the China Banking Regulatory Commission distributed guidance to strengthen the supervision of loans to LGFVs, which the commission estimates totaled 9.2 trillion yuan ($1.47 trillion), or 14 percent of total bank loans, at the end of 2012.

The guideline prohibits banks from increasing the scale of loans made to such vehicles, and requires them to include corporate bonds, medium-term notes, short-term financing bills, trust plans and wealth management products in their statistics on financing LGFV debt.

It also said banks should not provide guarantees for the vehicle debt, and must be cautious with regard to holding bonds issued by such vehicles.

This new requirement widens CBRC's surveillance and increases the transparency of LGFV risk.

"In addition, a ban on guarantees will help insulate banks from contingent liabilities associated with LGFV bonds," she said, adding the new measures may strain the liquidity of some weaker financing vehicles.