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Wednesday 10 March 2010
China to Nullify Loan Guarantees by Local Governments
China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases.
China to Nullify Loan Guarantees by Local Governments
By Bloomberg News 09 March 2010
China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases.
The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as early as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.
China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on such loans, estimated at about 11.4 trillion yuan ($1.7 trillion) at the end of 2009 by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad debts as projects are left without funding, Shih said this month.
“By striking the fear of God into lenders, regulators hope to get them to turn off the tap,” said Patrick Chovanec, a professor at Tsinghua University in Beijing. “Banks have lent on the assumption that a lot of these infrastructure projects are risk-free, but many had no creditworthiness beside the guarantees.”
The Hang Seng Finance Index, which tracks Hong Kong-traded shares of banks including Industrial & Commercial Bank of China Ltd., closed 2 percent higher today.
‘Big Risk’
Su Ning, a deputy governor at China’s central bank, said today that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said at a press briefing in Beijing.
“China’s sending a very strong signal that this kind of financing is over,” said Chovanec, an associate professor in the School of Economics and Management at Tsinghua University. “It raises the specter that China’s banking system has a lot more risk in it than people previously thought.”
Central bank governor Zhou Xiaochuan said March 6 during the National People’s Congress that while “many” local financing vehicles have the ability to repay, two types cause concern.
Struggling With Debt
One uses land as collateral, while the other can’t fully repay borrowings, meaning local governments may be liable, leading to “fiscal risks,” he said.
A few cities and counties may struggle with repayments in coming years because of debt ratios already exceeding 400 percent, a person with knowledge of the matter said in January. The ratio is of year-end outstanding debt to annual disposable fiscal income.
The financing vehicles of large coastal cities are well- funded as most have publicly traded subsidiaries that can raise capital from the markets and rely less on bank loans. Entities in northern and western China are of particular concern, the banking regulator’s Yan said while attending annual parliamentary meetings.
The 1998 collapse of Guangdong International Trust & Investment Corp., which borrowed domestically and overseas on behalf of southern China’s Guangdong province, left creditors including Dresdner Bank AG of Germany and Bank One Corp. in the U.S. with $3 billion of unpaid bonds. It marked the first time that Chinese authorities failed to bail out one of the nation’s state-owned trusts.
Commercial banks have been told to assess the size of such lending and stop providing further credit if they find problems, Yan said.
Bank of China Ltd. President Li Lihui said in an interview last week that the nation’s third-largest lender has reviewed loans to local governments and identified some financing vehicles that didn’t have adequate liquidity to make payment. The bank plans to exit projects without proper collateral and reduce new advances to local governments this year, Li said.
ICBC Chairman Jiang Jianqing said the lender found some risks in such borrowing arms. Those situations aren’t yet widespread, Jiang said. The bank inspected its loans extended to local government financing vehicles in 2008 and 2009 and “so far didn’t find many big problems,” ICBC President Yang Kaisheng said yesterday.
‘Red Herring’
Jonathan Anderson, an economist at UBS AG, said March 5 he saw a “classic red herring” in arguments that “enormous, hidden off-balance-sheet liabilities” among China’s local governments could precipitate a debt crisis.
The use of local-government financing vehicles is a “micro-level” issue, not one that affects judgments on the strength of a Chinese economy which is “nowhere near to a crisis or implosion,” Anderson said.
Northwestern’s Shih estimated that borrowing by China’s 8,000 local-government entities may have totaled 11.429 trillion yuan in outstanding debt by the end of last year and they had credit lines with banks for an additional 12.767 trillion yuan. That may result in bad loans of up to 3 trillion yuan even if the government cracks down on funding, he said.
China’s banks had 497 billion yuan of non-performing loans as of Dec. 31, accounting for 1.58 percent the nation’s total advances, according to the banking regulator.
2 comments:
China to Nullify Loan Guarantees by Local Governments
By Bloomberg News
09 March 2010
China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases.
The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as early as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.
China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on such loans, estimated at about 11.4 trillion yuan ($1.7 trillion) at the end of 2009 by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad debts as projects are left without funding, Shih said this month.
“By striking the fear of God into lenders, regulators hope to get them to turn off the tap,” said Patrick Chovanec, a professor at Tsinghua University in Beijing. “Banks have lent on the assumption that a lot of these infrastructure projects are risk-free, but many had no creditworthiness beside the guarantees.”
The Hang Seng Finance Index, which tracks Hong Kong-traded shares of banks including Industrial & Commercial Bank of China Ltd., closed 2 percent higher today.
‘Big Risk’
Su Ning, a deputy governor at China’s central bank, said today that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said at a press briefing in Beijing.
“China’s sending a very strong signal that this kind of financing is over,” said Chovanec, an associate professor in the School of Economics and Management at Tsinghua University. “It raises the specter that China’s banking system has a lot more risk in it than people previously thought.”
Central bank governor Zhou Xiaochuan said March 6 during the National People’s Congress that while “many” local financing vehicles have the ability to repay, two types cause concern.
Struggling With Debt
One uses land as collateral, while the other can’t fully repay borrowings, meaning local governments may be liable, leading to “fiscal risks,” he said.
A few cities and counties may struggle with repayments in coming years because of debt ratios already exceeding 400 percent, a person with knowledge of the matter said in January. The ratio is of year-end outstanding debt to annual disposable fiscal income.
The financing vehicles of large coastal cities are well- funded as most have publicly traded subsidiaries that can raise capital from the markets and rely less on bank loans. Entities in northern and western China are of particular concern, the banking regulator’s Yan said while attending annual parliamentary meetings.
The 1998 collapse of Guangdong International Trust & Investment Corp., which borrowed domestically and overseas on behalf of southern China’s Guangdong province, left creditors including Dresdner Bank AG of Germany and Bank One Corp. in the U.S. with $3 billion of unpaid bonds. It marked the first time that Chinese authorities failed to bail out one of the nation’s state-owned trusts.
Halting Credit
Commercial banks have been told to assess the size of such lending and stop providing further credit if they find problems, Yan said.
Bank of China Ltd. President Li Lihui said in an interview last week that the nation’s third-largest lender has reviewed loans to local governments and identified some financing vehicles that didn’t have adequate liquidity to make payment. The bank plans to exit projects without proper collateral and reduce new advances to local governments this year, Li said.
ICBC Chairman Jiang Jianqing said the lender found some risks in such borrowing arms. Those situations aren’t yet widespread, Jiang said. The bank inspected its loans extended to local government financing vehicles in 2008 and 2009 and “so far didn’t find many big problems,” ICBC President Yang Kaisheng said yesterday.
‘Red Herring’
Jonathan Anderson, an economist at UBS AG, said March 5 he saw a “classic red herring” in arguments that “enormous, hidden off-balance-sheet liabilities” among China’s local governments could precipitate a debt crisis.
The use of local-government financing vehicles is a “micro-level” issue, not one that affects judgments on the strength of a Chinese economy which is “nowhere near to a crisis or implosion,” Anderson said.
Northwestern’s Shih estimated that borrowing by China’s 8,000 local-government entities may have totaled 11.429 trillion yuan in outstanding debt by the end of last year and they had credit lines with banks for an additional 12.767 trillion yuan. That may result in bad loans of up to 3 trillion yuan even if the government cracks down on funding, he said.
China’s banks had 497 billion yuan of non-performing loans as of Dec. 31, accounting for 1.58 percent the nation’s total advances, according to the banking regulator.
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