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Sunday 14 March 2010
Rescue tipped for banks overexposed to local government losses
China may be forced to rescue banks that made loans for local government projects under the unprecedented stimulus programme revealed in 2008, according to Citigroup and an academic from Northwestern University.
Rescue tipped for banks overexposed to local government losses
Bloomberg 13 March 2010
China may be forced to rescue banks that made loans for local government projects under the unprecedented stimulus programme revealed in 2008, according to Citigroup and an academic from Northwestern University.
In the worst case, losses from lending to local government investment vehicles could climb to 2.4 trillion yuan (HK$2.72 trillion) by next year, wrote Shen Minggao, Citigroup’s chief economist for greater China, in a note.
Meanwhile, Victor Shih, a professor at Northwestern University, said: “The most likely case is the Chinese government will engineer a massive financial bailout of the financial sector.” Shih has spent months researching borrowing by about 8,000 government entities.
Chinese officials pledged this week to limit the risks posed by the investment vehicles, which circumvent restrictions on local government borrowing to channel money into stimulus projects.
Yan Qingmin, the head of the Shanghai branch of the China Banking Regulatory Commission, said earlier this month that China plans to nullify guarantees provided by local governments for some loans.
Shen said officials may keep monetary policy loose for too long, boosting asset prices and building up overcapacity, to avoid the “squeeze” on investment vehicles that would trigger bad loans and rescues.
“The risk is inflation or asset bubbles force the government to withdraw support to local governments much earlier than expected,” he said. In Shen’s worst case, commercial banks, lending because of explicit or implicit government guarantees rather than the quality of projects, see 20 per cent of lending to investment vehicles turn bad next year.
Premier Wen Jiabao is weighing when to exit crisis policies as property prices surge, inflation climbs and exports rebound, highlighting the risk of overheating in the world’s fastest-growing key economy, awash with cash from unprecedented lending last year.
However, Shih is pessimistic. He said that if the central government stopped lending to the entities now, the cost of a bailout might already be “in the neighbourhood” of three trillion yuan.
He said “the only credible action by the central government now is to allow a handful of these entities to go bankrupt - so that the banks know that the central government means business when it says it’s withdrawing guarantees”.
Su Ning, a deputy governor at the People’s Bank of China, said on Monday that a “fairly high proportion” of lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans last year. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said.
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Rescue tipped for banks overexposed to local government losses
Bloomberg
13 March 2010
China may be forced to rescue banks that made loans for local government projects under the unprecedented stimulus programme revealed in 2008, according to Citigroup and an academic from Northwestern University.
In the worst case, losses from lending to local government investment vehicles could climb to 2.4 trillion yuan (HK$2.72 trillion) by next year, wrote Shen Minggao, Citigroup’s chief economist for greater China, in a note.
Meanwhile, Victor Shih, a professor at Northwestern University, said: “The most likely case is the Chinese government will engineer a massive financial bailout of the financial sector.” Shih has spent months researching borrowing by about 8,000 government entities.
Chinese officials pledged this week to limit the risks posed by the investment vehicles, which circumvent restrictions on local government borrowing to channel money into stimulus projects.
Yan Qingmin, the head of the Shanghai branch of the China Banking Regulatory Commission, said earlier this month that China plans to nullify guarantees provided by local governments for some loans.
Shen said officials may keep monetary policy loose for too long, boosting asset prices and building up overcapacity, to avoid the “squeeze” on investment vehicles that would trigger bad loans and rescues.
“The risk is inflation or asset bubbles force the government to withdraw support to local governments much earlier than expected,” he said. In Shen’s worst case, commercial banks, lending because of explicit or implicit government guarantees rather than the quality of projects, see 20 per cent of lending to investment vehicles turn bad next year.
Premier Wen Jiabao is weighing when to exit crisis policies as property prices surge, inflation climbs and exports rebound, highlighting the risk of overheating in the world’s fastest-growing key economy, awash with cash from unprecedented lending last year.
However, Shih is pessimistic. He said that if the central government stopped lending to the entities now, the cost of a bailout might already be “in the neighbourhood” of three trillion yuan.
He said “the only credible action by the central government now is to allow a handful of these entities to go bankrupt - so that the banks know that the central government means business when it says it’s withdrawing guarantees”.
Su Ning, a deputy governor at the People’s Bank of China, said on Monday that a “fairly high proportion” of lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans last year. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said.
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