While the world markets continue its melt-up, here’s some Big News from China – according to Bloomberg, all loan guarantees by local governments are now declared null and void.
Yes. Null and void.
For those wondering what the BFD is, try putting yourself in the shoes of those who lent approximately US$3.5 Trillion (yes, it’s T, not B) to local governments across the Middle Kingdom.
This is the financial equivalent of “Fire One” in nuclear weapons parlance (haha Gorby – you’re such a kidder). Creditors (fortunately..ahem…Goldman Sachs is one of them) are now wondering which congressman to lobby to get their money back. Opinion is probably divided between creditors: half of them will want the US to launch its entire nuclear arsenal towards Beijing, while the other half are eyeing a 40th story leap as the less painful option.
From Bloomberg, “China to Nullify Financing Guarantees by Local Governments”
China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.
The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.
China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.
“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”
Fiscal Risks
Central bank governor Zhou Xiaochuan said March 6 during the National People’s Congress that while “many” local financing vehicles have the ability to repay, two types cause concern. One uses land as collateral, while the other can’t fully repay borrowing, meaning that the local governments may be liable, leading to “fiscal risks.”
Premier Wen Jiabao, at the opening of the annual parliamentary meetings last week, said the central government would sell 200 billion yuan of bonds for a second year to help local governments fund infrastructure projects. Wen also warned of “latent risks” in China’s banking system as he pledged to continue a moderately loose monetary policy and a proactive fiscal stance.
The parliamentary meetings will end March 14 with Premier Wen’s annual press conference in Beijing.
A few cities and counties may face very large repayment pressure in coming years because of debt ratios already exceeding 400 percent, a person with knowledge of the matter said in January. The ratio is of year-end outstanding debt to annual disposable fiscal income.
Regional Concerns
The financing vehicles of large coastal cities are well-funded as most have publicly traded subsidiaries that can raise capital from the markets and rely less on bank loans. Entities in northern and western China are of particular concern, the banking regulator’s Yan said while attending the parliamentary meetings.
The 1998 collapse of Guangdong International Trust & Investment Corp., which borrowed domestically and overseas on behalf of southern China’s Guangdong province, left creditors including Dresdner Bank AG of Germany and Bank One Corp. in the U.S. with $3 billion of unpaid bonds. It marked the first time that Chinese authorities failed to bail out one of the nation’s state-owned trusts.
Commercial banks have already been told to assess their exposure to such lending and stop providing further credit if problems are found, Yan said.
Commercial Banks
Bank of China Ltd. President Li Lihui said in an interview last week that the nation’s third-largest lender has reviewed its exposure to borrowings by local governments and identified some financing vehicles that didn’t have adequate liquidity to make payment. The bank plans to exit projects without proper collateral and reduce new advances to local governments this year, Li said.
Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing said the lender found some risks in such borrowing arms. These situations aren’t yet widespread, Jiang said. The bank has already inspected its loans extended to local government financing vehicles in 2008 and 2009 and “so far didn’t find many big problems,” ICBC President Yang Kaisheng said yesterday.
China’s banks doled out a combined 9.59 trillion yuan in new loans last year, helping the government engineer a turnaround in the world’s third-largest economy. The credit binge sparked concern about more bad loans and asset bubbles.
Northwestern’s Shih estimated that borrowing by China’s 8,000 local-government entities may have totaled 11.429 trillion yuan in outstanding debt by the end of last year and they had credit lines with banks for an additional 12.767 trillion yuan. That may result in bad loans of up to 3 trillion yuan.
China’s banks had 497 billion yuan of non-performing loans as of Dec. 31, accounting for 1.58 percent the nation’s total advances, according to the banking regulator.
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