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August 20, 2010

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Ministry calms debt risk fear

CHINA'S Finance Ministry and banking regulator yesterday moved to instill confidence in local government financing vehicles, dismissing speculation of widespread bad-loan risks.

"There are some risks with loans to the financing vehicles, but the overall risk is manageable and will not lead to systemic risk," said a statement jointly issued yesterday by the Ministry of Finance and the China Banking Regulatory Commission.

Barred by law from borrowing directly, local authorities in China have established special purpose funding vehicles, which had borrowed 7.66 trillion yuan (US1.13 trillion) by the end of June, to circumvent the ban, the CBRC said in July.

The CBRC also said 23 percent of these loans could go sour.

The growth of loans to the financing platforms was slowing down, the statement said.

"The share of loans to the financing vehicles in the first half was down by one third from the proportion for the whole of 2009.

"Most of the loans will be repayable from steady and sufficient cash flow generated by the investment," the statement said.

"For the portion that faces inadequate repayment sources, banks had applied measures, including debt restructuring and collateral raising, to cover possible defaults," the statement said.

"Not all these loans will turn into bad loans, let alone losses," it added.

They also cited the high provisioning ratios of Chinese banks as a safety net.

"With their provisioning ratios at a minimum of 150 percent, China's banks are sufficiently well positioned to absorb any possible defaults."

The statement comes amid a wave of warnings from experts that the lack of transparency and rapid rise in local government debt, especially in the past two years, risks seriously harming the country's financial system.

The CBRC said in May that outstanding loans to local financing vehicles totaled 7.38 trillion yuan at the end of last year, almost a fifth of the country's total loans, which were 39.97 trillion yuan.





 

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