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Local Governments Face Severe Debt Pressure
Summary:36 local governments have a combined bank debt of over 3 trillion yuan that will mostly come due over the next year. Stricter measures have been put in place on new loans, but banks might experience a near tripling of bad loans in 2013 and a 55 percent drop in profits compared to 2010.

June 13, 2013
Translated by Zhu Na

Data issued by the National Audit Office on June 10 showed that by the end of 2012, the debts of 36 local governments together reached close to 3.85 trillion yuan. Of this, 78 percent was in the form of bank loans.

2013 and 2014 will be the peak repayment periods for these debts. A research report released by BOC International says that under the worst case scenario, the proportion of loans from government-controlled platforms that go bad could reach 30 percent. This would mean that China’s overall bad loan ratio would increase to 3.9 percent from the current 1.16 percent. That in turn would mean listed banks’ net profits would drop 55 percent compared to 2010.

Regulators and banks have strengthened control over new loans in order to mitigate the risks. In May, the China Banking Regulatory Commission (CBRC) barred banks from increasing the scale of government-controlled loan platforms and asked banks to strictly control their standards for issuing new loans.

2012 annual reports showed that the major state-owned banks have been reigning in their support for the financing platforms of local governments. Bank of China’s loans to these platforms fell by 2.3 billion yuan in 2012 while Agricultural Bank of China’s (ABC) loans decreased by 4.8 billion yuan and China Merchants Bank’s by 23.7 billion yuan.

Many banks have been keen to get involved with urbanization projects being spearheaded by local governments in recent years, but there are worries that this has set the stage for a major debt crisis.

“Urbanization development provided good development opportunities for banks,” said Zhang Yunzeng (张云曾), president of ABC, at a conference in March. “The problem is whether banks can grab the opportunity and work out a corresponding strategy.”

Regulators also support bank financing of urbanization construction, but the guidance that CBRC issued this year for strengthening risk supervision on loans didn’t list any specific direction or details about where investment should be directed. Banking professionals have said that infrastructure and local real estate projects are the most straightforward and have the lowest risk, so they tend to focus on these areas. 

Lian Ping (连平), chief economist at Bank of Communications, said on one hand commercial banks see that while there are worries of hidden risk, they’re overall optimistic and don’t see systemic risk. But on the other hand, local governments’ demand for investment and financing has been unprecedented. Although the debt risks are manageable and don’t represent systemic risk, local governments will still face severe repayment pressure in the short-term as many of their debts become due over the next year-and-a-half.

Links and sources:
Beijing News: 36个地方政府银行贷款余额超3万亿



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