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Banks: No uncontrollable local debt risks

By Song Jingli and Zhao Tingting (chinadaily.com.cn)
Updated: 2010-09-02 17:22

Editor's note: Trading volume of China's real estate sector has slumped since April, when the central government rolled out a series of measures, including higher down payments for second homes and an end to mortgage loans for third homes, to slow the surging housing prices.

Concerns have mounted over local governments' ability to repay their debts, which they collected via so-called financing platforms, since proceeds from land sales have been a large part of local fiscal revenue. People became concerned about China's banking industry, as some of their lending went to these financing platforms. There are even greater concerns that risks from these local debts may trigger a large-scale crisis.

What is the real picture? Will the worst scenario occur?

 

China to sell 35.8b yuan local govt bonds

China's Ministry of Finance will sell two batches of local government bonds worth of 35.8 billion yuan ($5.25 bilion) on behalf of twelve provinces, municipalities and autonomous regions, starting next Monday, the Oriental Morning Post reported.

The sales are the seventh and eighth local government bond sales this year. The seventh batch includes 20.6 billion yuan of three-year bonds and the eighth has 15.2 billion yuan of five-year bonds. [Full Story]

Local debts controllable, but scale still unclear

Chinese bank loans to local government-backed investment units are controllable, according to the interim results of listed banks, but the scale of these local financing platforms are still unclear, the National Business Daily reported on Aug 26.

By Tuesday, seven listed banks had released their interim results and an industry insider says these reports show that banks have done a relatively good job at reining in the risks of local governments' financing platforms. "They have operated according to regulations," the person told reporters. [Full Story]

CCB downplays default risks

The chairman of China Construction Bank (CCB) said on Aug 23 that the default risk for local government-backed financing vehicles is low as most loans are backed by collateral and ample bad loan provisions are already in place.

A man cycles past a branch of China Construction Bank Corp in Shanghai. Kevin Lee / Bloomberg

"The bank has 580 billion yuan ($85.28 billion) in outstanding loans to local government-backed financing vehicles as of the end of June, with a non-performing loan ratio standing at barely 0.11 percent," Guo Shuqing, chairman of China Construction Bank, the world's second-largest lender by market value, said upon release of the bank's first half results. [Full Story]

 

Local govt financing 'cleanup' to be started

China's central government plans to issue rules for the "cleanup" of local government financing vehicles, the Shanghai Securities News reported, without saying where it got the information.

The National Development and Reform Commission, the Ministry of Finance, the People's Bank of China and the China Banking Regulatory Commission plan to jointly issue the rules, the Shanghai-based newspaper reported. [Full Story]

Agencies told to limit risks

The investment arms of Chinese local governments are being told to report how they will limit financial risks as a cleanup of the system begins, a newspaper said on July 26, amid concern banks might be hurt if they cannot repay multibillion-dollar debts.

Chinese leaders have expressed concern about the health of "financing platforms" that invest in infrastructure and real estate and borrowed heavily under Beijing's stimulus. [Full Story]

China to exclude some local debt from clean-up

China will exclude 27 percent of bank loans to local government projects from a forthcoming clean-up of financing vehicles run by local officials, two banking sources told Reuters on July 70.

About 23 percent of the 7.66 trillion yuan ($1.13 trillion) in loans that banks have extended to these vehicles are at risk of default, but 27 percent are generating enough cash flow to pay off the loans, according to data leaked from a meeting of bankers and regulators. [Full Story]

China investment vehicles will issue more bonds

China will probably let more investment companies backed by local governments issue bonds, according to the group that regulates the country's interbank bond market.

On July 14, Shangrao City Construction Investment Development Group Co sold 1 billion yuan ($148 million) of seven-year bonds, restarting sales a month after a central- government-imposed halt, the National Association of Financial Market Institutional Investors said in a report today. [Full Story] 

 

China faces challenges to maintain healthy bank industry

China faces many challenges in its efforts to maintain the health of the banking industry, including risks from local government financing vehicles, property loans and industrial overcapacity, bank regulator Liu Mingkang said. [Full Story]

Concerns over bank shares

A statue near a branch of the Agricultural Bank of China Ltd (ABC) in Shanghai. [Qilai Shen / Bloomberg]

The lending to local government financing vehicles accounts for 18 to 20 percent of total loans in the Chinese banking system. If 30 percent of these loans turn sour, it could add four to six percentage points - or the equivalent of $400 billion - to the non-performing loan ratio of the banking system, Standard and Poor's warned in a recent report. [Full Story]

Banks give out fewer new loans in July

"Lending for real estate sector, local government financing and sectors that heavily consume energy and resources and are highly polluting would decrease," Dong Xian'an, the chief economist of Industrial Securities said. [Full Story]

Citic Bank sees capital adequacy challenges ahead

When asked about the risks in local government debts, Zhao said that the bank has collected all its loans to local government financing vehicles in the first half and there are no overdue loans. He added that the bank has exited from troubled government debts accounting for less than 1 percent of the total amount. [Full Story]

 

Long-term govt bonds a 'bad bet'

Long-term government bonds are a bad bet anywhere because nations are issuing debt to bolster their currencies, said James Chanos, hedge fund manager and founder of Kynikos Associates Ltd.

James Chanos, hedge fund manager of Kynikos Associates Ltd. [DANIEL ACKER / BLOOMBERG]

"Whether it's China, or the European Union or even the United States - if there's anything the central bankers and authorities have shown you is that we're worried about currency issues down the road so we're going to continue to issue debt to avoid any payment deflation," Chanos said at the Bloomberg Markets Hedge Fund Summit. "Long-term government bonds anywhere would probably be a bad bet right now." [Full Story]

Crackdown on local debt may restrain economy

China's efforts to contain the risks from a surge in local-government debt may hurt growth in the world's third-biggest economy, investment bank China International Capital Corp said.

A report by the chief auditor last week indicated officials may take "relatively forceful measures" including strictly controlling new borrowing, CICC economists led by Hong Kong-based Ha Jiming said in a report today. The effect may be to "limit the source of funding for infrastructure projects and affect future economic growth." [Full Story]

CLSA confident about mainland lenders' prospects

Credit rating agency Standard & Poor's warns that increasing non-performing loans (NPL) could cripple the credit health of mainland banks; but CLSA believes that mainland lenders are at a turning point for business growth, as bad loans remain manageable.

"Mainland banks are probably safer than Western banks, and the balance sheet of the Chinese government is much stronger than that of Western governments," Francis Cheung, managing director of CLSA Asia Pacific Markets, said at a Thursday briefing. [Full Story]

Bond sales to unravel debt picture of local govts

"Don't forget Chinese central and local governments have huge assets including the State-owned companies, and the nation's saving rate is high enough to counter indebtedness," said Wang Tao, head of China Economic Research at UBS Securities.

She said the slowdown of the economic situation would affect the quality of these banking assets but local fiscal revenue has been abundant this year and loose monetary policies helped to offset the negative effect. [Full Story]

 

 

Local governments in China are not allowed to borrow directly from banks to fund deficits and support infrastructure construction.

Local governments are prohibited from raising funds directly from the market before 2009, and since then the central government has only permitted the Ministry of Finance to issue a limited amount of bonds on behalf of the fund-thirsty local governments.

In consequence, many have set up investment vehicles named financing by using land and fiscal revenue as collateral.

About 8,000 such funding vehicles had been established and by the end of June lenders disbursed more than 7.7 trillion yuan ($1.14 trillion) to finance local government projects, one-fifth of which are classified by the China Banking Regulatory Commission (CBRC) as "questionable".