China Seeks to Downplay Finance Vehicle Loan Fears

CBRC says that local government financing loans in China will not go bad

China’s Banking Regulatory Commission (CBRC) said that local government financing loans will not go bad, seeking to alleviate concerns about its potential risks.

The commission explained that risks can be minimized through safety nets to ensure repayments, and that these loans are supported by guarantees.

On a separate announcement, Finance Minister Xie Xuren also called out to local governments to improve their handling of their finances.

According to a source privy to the research gathered by the CBRC, Chinese banks may fail to recover 23 percent of the 7.7 trillion yuan ($1.1 trillion) owed to them by local governments to finance infrastructure projects.

The data estimates that up to $260 billion in debt may not be paid, equivalent to roughly five times the capital the five biggest banks are currently raising.

“We should assume the real problem is worse than the initial evaluation. “And there is likely to be more to come.” said Michael Pettis, finance professor at Peking University and former head of emerging markets at Bear Stearns & Cos.

China’s local government units utilize financing vehicles because of the units’  fairly limited ability to directly borrow money in accordance with current rules. The funds are spent on building highways, bridges, and airports. Amid concerns that borrowed money is not utilized properly, the central government this year clamped down on borrowing by local governments.

China has 1,000 county-level governments and hundreds of city and town councils which have borrowed heavily from banks during the country’s credit fueled stimulus in 2009 .

Posted by James Fried on Wednesday July 28 2010, 10:28 AM EST. All trademarks acknowledged. Filed under Featured News, Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0