Cabinet orders evaluation of stimulus loans
By Joe McDonald |
May 28, 2010, Friday
|
Print Edition
Print Edition
THE State Council, or China's Cabinet, ordered a review yesterday of investment agencies run by local governments amid warnings that Chinese banks might face problems if they cannot repay multibillion-dollar loans.
The order was the highest-profile expression of government concern following warnings by the World Bank and others about heavy debt at such agencies, which invest in real estate and infrastructure as part of China's economic stimulus package.
"We must strengthen management of local financing platform companies in order to maintain economically sustainable healthy development and social stability," said a Cabinet statement issued after a meeting led by Premier Wen Jiabao.
Local authorities must "deal with the issue of debt repayment and financing for projects that already are under construction," the statement said.
It gave no details of the size of debts or possible losses.
Chinese banks are seen as the world's healthiest after avoiding the mortgage-related turmoil that hit Western institutions.
But analysts warned the stimulus-driven lending boom might leave some with a mountain of bad loans.
Some media reports say local government investment agencies owe 6 trillion yuan (US$880 billion) to state banks.
An American researcher, Victor Shih of Northwestern University, estimates local government borrowing in 2004-09 at 12 trillion yuan.
The World Bank and China's central bank say banks could face losses if the agencies, known as "finance platforms," cannot repay debts.
Local government finance platforms accounted for a "very high proportion" of last year's bank lending, a deputy central bank governor, Su Ning, said in March during the annual meeting of the national legislature.
State banks lent 9.6 trillion yuan in 2009 under orders to support the stimulus.
"This could have potential risks," Su said then.
Profit drive
China spent about US$400 billion over the past decade clearing away non-performing loans at state banks, which were long expected to lend to prop up government companies without regard to repaying debts.
That recapitalization was part of an effort to turn Chinese banks into profit-driven institutions judging borrowers on commercial grounds.
After the global crisis struck in 2008, banks were ordered to relax lending standards and flood the economy with credit.
The World Bank warned in a March report that the financing platforms' growing debts was one of a series of "macroeconomic risks" stemming from the stimulus.
The central government paid for a quarter of its 4 trillion yuan stimulus plan.
The rest of the cash came from state companies and borrowing by lower-level governments from state banks.
The order was the highest-profile expression of government concern following warnings by the World Bank and others about heavy debt at such agencies, which invest in real estate and infrastructure as part of China's economic stimulus package.
"We must strengthen management of local financing platform companies in order to maintain economically sustainable healthy development and social stability," said a Cabinet statement issued after a meeting led by Premier Wen Jiabao.
Local authorities must "deal with the issue of debt repayment and financing for projects that already are under construction," the statement said.
It gave no details of the size of debts or possible losses.
Chinese banks are seen as the world's healthiest after avoiding the mortgage-related turmoil that hit Western institutions.
But analysts warned the stimulus-driven lending boom might leave some with a mountain of bad loans.
Some media reports say local government investment agencies owe 6 trillion yuan (US$880 billion) to state banks.
An American researcher, Victor Shih of Northwestern University, estimates local government borrowing in 2004-09 at 12 trillion yuan.
The World Bank and China's central bank say banks could face losses if the agencies, known as "finance platforms," cannot repay debts.
Local government finance platforms accounted for a "very high proportion" of last year's bank lending, a deputy central bank governor, Su Ning, said in March during the annual meeting of the national legislature.
State banks lent 9.6 trillion yuan in 2009 under orders to support the stimulus.
"This could have potential risks," Su said then.
Profit drive
China spent about US$400 billion over the past decade clearing away non-performing loans at state banks, which were long expected to lend to prop up government companies without regard to repaying debts.
That recapitalization was part of an effort to turn Chinese banks into profit-driven institutions judging borrowers on commercial grounds.
After the global crisis struck in 2008, banks were ordered to relax lending standards and flood the economy with credit.
The World Bank warned in a March report that the financing platforms' growing debts was one of a series of "macroeconomic risks" stemming from the stimulus.
The central government paid for a quarter of its 4 trillion yuan stimulus plan.
The rest of the cash came from state companies and borrowing by lower-level governments from state banks.
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