Daniel Ren in ShanghaiMar 09, 2010
Shanghai's banking regulator said local lenders must reassess the risks of loans they have made to government financing arms, the latest sign that the mainland's mammoth stimulus package of last year is backfiring.
The Shanghai branch of the China Banking Regulatory Commission said yesterday that some of the massive loans distributed to government-backed financing vehicles had become questionable.
"Some problems lie in the soaring loans to the government's financing vehicles," it said. "The leaders of the State Council and the CBRC attach great importance to the issue."
The statement did not name the so-called financing vehicles - government investment entities that deal with large infrastructure projects. Such vehicles issue bonds or secure bank loans to raise funds for urban construction, with the local government acting as guarantor.
In Shanghai, well-known investment firms of this kind are Shanghai Chengtou Holding, which deals with the supply of water and provision of waste water treatment services, and Shanghai Tongsheng Investment (Group), which is in charge of the construction of the Yangshan deep-water port.
In late February, the CBRC required banks to control lending to financing vehicles backed by local governments amid worries that the lending binge would spark a surge in bad debts.
Beijing unveiled a 4 trillion yuan (HK$4.54 trillion) investment expansion plan at the end of 2008 as part of its efforts to combat the global slowdown. Mainland banks granted a total of 9.6 trillion yuan in loans last year, nearly double the minimum target of 5 trillion yuan.
Victor Shih, a professor at Northwestern University in the US, estimates the total value of loans raised by local governments through the financing vehicles at 11.4 trillion yuan as of the end of last year. He said the lending spree could trigger a "gigantic wave" of bad debts and the worst scenario would be a large-scale financial crisis around 2012.
Su Ning, a deputy central bank governor, told a news conference in Beijing yesterday that mainland banks might face risks if projects using finance arms' funds could not generate returns.
Chinese bank loans for public sector investment projects carried implicit or explicit guarantees, so were almost on a par with bonds, said Jing Ulrich, JP Morgan's chairman for China equities and commodities. "The magnitude of public sector debt risk does not appear as severe as some have suggested."
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