Banks required to restrict loans to local governments

March 20th, 2012 | Global Times

China’s top banking regulator has ordered the country’s banks to restrict the amount of new loans to local government financing vehicles (LGFVs), a move indicating the authorities’ determination to clean up the massive debts of local governments, experts told the Global Times yesterday.

China Banking Regulatory Commission (CBRC) issued detailed guidelines last week for strengthening risk management with LGFVs, the Shanghai-based daily China Business News reported yesterday.

According to the guidelines, loans requested by LGFVs must be divided into five categories, and lending should only be allowed in certain cases. Loans should also be forbidden in some situations, and if LGFVs are found to be in financial trouble, they must arrange a timetable of debt repayment.

“The guidelines are too strict, which makes the pressure of paying back loans even bigger for local governments,” Liu Yuhui, director of the Economic Assessment Center of the Chinese Academy of Social Sciences, said yesterday, adding that the authorities are clearly speeding up the process of local debt clean-ups.

Liu said that market expectations had been that the authorities would support the local governments in paying back debts in various ways, not by “severely tightening the amount of loans for LGFVs.”

Local governments need to pay back a total of 1.3 trillion yuan ($206 billion) by the end of 2012, Securities Times newspaper reported in January. They also guaranteed 297 billion yuan worth of debts that will mature at the year-end, it said.

The huge loans were mostly lent by banks and used by local governments for costly infrastructure projects.

Shang Fulin, head of the CBRC, warned at the end of last year that some 35 percent of the debt owed by LGFVs would come due over the next three years, and concerns about the governments’ ability to pay back the huge debts have been growing.

However, Guo Tianyong, director of the Research Center of China Banking at the Central University of Finance and Economics, told the Global Times that he does not think a debt default by local governments is likely.

“The governments’ fiscal revenues, generated by the tax payers, are the guarantee for the debts,” said Guo.

By Fang Yunyu

Category: Finance