China’s banking regulator has banned the country’s lenders from creating new loans via local government financing vehicles (LGFV) as it tries to rein in ballooning risks with rising defaults

China Regulator Bans Lenders From Creating New LGFV Loans

04-15 16:26 Caijing

“For LGFVs with a lower-than-100 percent cash flow coverage ratio or higher-than-80 percent debt-to-assets ratio, their loans as a share of total bank lending should not be higher than that in the previous year”

China’s banking regulator has banned the country’s lenders from creating new loans via local government financing vehicles (LGFV) as it tries to rein in ballooning risks with rising defaults. Banks should control loans to LGFVs and must not increase its size, according to a guideline issued by the China Banking Regulation Commission. “For LGFVs with a lower-than-100 percent cash flow coverage ratio or higher-than-80 percent debt-to-assets ratio, their loans as a share of total bank lending should not be higher than that in the previous year,” the CBRC said. The CBRC has also reiterated banks should take a “cautious” approach in holding bonds from LGFVs, and bar local governments from using public assets as loan guarantees on behalf of their financing vehicles. Most Chinese local governments are forbidden from borrowing money directly. Some have set up special financial vehicles to help get round such restrictions and provide funding for costly infrastructure projects which usually take years to generate returns.Shang Fulin, director of the banking watchdog, said earlier this month that loans to local government vehicles had risen 2 percent over the past two years to 9.3 trillion yuan.

Local infrastructure spending is widely expected to be the key driver of the world’s second biggest economy, which just reported a slower growth rate of 7.7 percent in the first quarter, as the new government is pushing urbanization to the center of its development platform.

But Beijing is also concerned about a possible rise in bad debt and more problematic credit that hurt banks, and thus growth, triggered by these opaque LGFVs.

Local bureaus of CRBC should report immediately if there are signs of defaults, or risks that could trigger a default, according to the new guideline.

Banking watchdog lays down line on loan risks

Tuesday, April 16, 2013

The China Banking Regulatory Commission has officially handed documents to financial institutions on regulating local government debts, whose size cannot rise this year.

“All institutions should control the total amount, improve the loan structure, segregate risks and declare the responsibility clearly,” the CBRC said.

Massive borrowings by local governments, ballooned from four trillion yuan (HK$5.01 trillion) in 2006 to 10.7 trillion yuan in 2010, according to official data.

Ratings agency Fitch downgraded China’s sovereign debt rating last week, warning that debts could threaten the country’s economic recovery. It expects local government debts to have hit 12.85 trillion yuan in 2012.

Meanwhile, a new round of personnel changes is taking place at China’s four largest banks.

Tian Guoli, chairman of China CITIC Bank Corp (0998), was appointed by the organization department of the Communist Party as secretary of the party committee in Bank of China (3988). The 52-year-old is expected to replace Xiao Gang, who heads China Securities Regulatory Commission.

The Bank of Communications (3328) announced the resignation of chairman Hu Huaibang “due to the needs of national financial work.” Hu was earlier reported to be in line to head China Development Bank, a financial institution directly under the State Council. GRACE CAO