Write-off set to benefit banks
By Kelvin Soh and Terril Yue Jones |
June 2, 2011, Thursday
|
Print Edition
Print Edition
CHINA'S top banks and its economy should benefit from a plan by the country to write off hundreds of billions of dollars in local government debt, although uncertainty over sharing the costs and concerns about the impact of the country's lending spree remain.
China's banking regulator plans to shift 2-3 trillion yuan (US$300-US$470 billion) in debt off the books of local governments, Reuters reported on Tuesday, reducing the risk of a wave of defaults that would threaten the stability of the world's second-biggest economy.
The sweeping plan underscores China's desire to act before the bad debt problem facing local governments becomes untenable, analysts said yesterday.
"Local government debt is a time bomb in the longer run, so it's positive for the whole economy," said Stanley Li, a banking analyst with Mirae Asset Securities.
Many local governments in China set up special financing vehicles to get around rules forbidding them from borrowing directly from banks.
China's top banks provided many of the loans as part of a huge economic stimulus program launched by Beijing in late 2008 to counter the global financial crisis.
Chinese authorities had worked out that local governments had borrowed around 10 trillion yuan, Reuters said in its report on Tuesday.
Local and provincial administrations may default on around 2 trillion yuan of loans, many of which were used fund uneconomic real estate and infrastructure projects, Chinese media have reported.
"There has been concern over asset quality risk, especially (to the financing vehicles)," said Victor Wang, an analyst with Macquarie Securities. "I think it's the right move - it removes uncertainty, and helps the banks operate on a more clear and sustainable basis."
The Industrial and Commercial Bank of China and China Construction Bank are the world's two biggest banks by market capital. The Agricultural Bank of China and Bank of China are ranked the third and fourth in China and among the world's top 10.
None of the four banks had immediate comment on the government's plan.
Government assumption of the debt would take a bulk of the burden off the books of the major banks at a time when China's red-hot economy has begun to slow.
"We believe this would be a general positive for the Chinese banks as we consider their local government financing vehicles' exposures to be the greatest risk to the banks' credit quality," Bernstein Research analyst Mike Werner wrote in a research note.
China's banking regulator plans to shift 2-3 trillion yuan (US$300-US$470 billion) in debt off the books of local governments, Reuters reported on Tuesday, reducing the risk of a wave of defaults that would threaten the stability of the world's second-biggest economy.
The sweeping plan underscores China's desire to act before the bad debt problem facing local governments becomes untenable, analysts said yesterday.
"Local government debt is a time bomb in the longer run, so it's positive for the whole economy," said Stanley Li, a banking analyst with Mirae Asset Securities.
Many local governments in China set up special financing vehicles to get around rules forbidding them from borrowing directly from banks.
China's top banks provided many of the loans as part of a huge economic stimulus program launched by Beijing in late 2008 to counter the global financial crisis.
Chinese authorities had worked out that local governments had borrowed around 10 trillion yuan, Reuters said in its report on Tuesday.
Local and provincial administrations may default on around 2 trillion yuan of loans, many of which were used fund uneconomic real estate and infrastructure projects, Chinese media have reported.
"There has been concern over asset quality risk, especially (to the financing vehicles)," said Victor Wang, an analyst with Macquarie Securities. "I think it's the right move - it removes uncertainty, and helps the banks operate on a more clear and sustainable basis."
The Industrial and Commercial Bank of China and China Construction Bank are the world's two biggest banks by market capital. The Agricultural Bank of China and Bank of China are ranked the third and fourth in China and among the world's top 10.
None of the four banks had immediate comment on the government's plan.
Government assumption of the debt would take a bulk of the burden off the books of the major banks at a time when China's red-hot economy has begun to slow.
"We believe this would be a general positive for the Chinese banks as we consider their local government financing vehicles' exposures to be the greatest risk to the banks' credit quality," Bernstein Research analyst Mike Werner wrote in a research note.
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