China has tightened rules on bank lending to local government financing vehicles (LGFVs), in a bid to constrain their mounting debts. But the new leadership’s desire to showcase its capability to ensure economic growth suggests enforcement of the new rules is questionable.
China Banking Regulatory Commission (CBRC) unveiled the draft guidelines yesterday. They require commercial banks to strictly control the quality of loans issued to LGFVs and closely monitor the repayment of the loans.
The detailed rules set a cap on the outstanding loan value to local governments, put conditions on the creation of new loans and clarify the exposure limits to the different levels of local government. The regulator even orders banks to monitor LGFVs’ non-bank exposures, such as their participation in the corporate bond market and trust products.
“While the guideline is well written,” said analysts at Barclays, “how serious the government is about implementation is a key issue. The government will need to keep the balance between slower investment and economic growth with rising risks in the financial system.”
In the new leadership’s first year, a 7.5% GDP growth target may still need a lot of investment support, the bank added.
Shang Fulin, chairman of CBRC, has said at the People’s Congress that the government would continue to control the overall volume of loans and dissolve the underlying risks. He said LGFV loans have grown 2% during the past two years to Rmb9.3 trillion ($1.5 trillion), which accounted for nearly 18% of China’s Rmb51.9 trillion GDP last year.
China’s banking regulator usually only publishes the figures for total outstanding loans to local government, while details about interest costs, maturities and refinancing are kept in the dark.
Banks have dealt with the government-debt problem by simply rolling over loans. In practice, they have little choice when debts mature on unfinished projects.
Beijing is aware of the problem and has already stepped up controls on LGFV loans, but local governments have moved to seek non-bank financing and bypass regulatory scrutiny. According to Wind’s data, LGFV bonds increased 53% year-on-year to Rmb2.7 trillion by the end of 2012. Since the first quarter of last year, the growth of government trust products has outpaced the overall growth of trust products. As of the end of 2012, total government trust products reached Rmb512 billion, up 98% year-on-year.
