Debt on China’s Local Gov’ Financing Platforms Forces Regulator into Balancing Act

06.03.2013 17:33

Debt on Local Gov’ Financing Platforms Forces Regulator into Balancing Act

CBRC forced to choose between stability of banking system and providing officials with the funding they need

By staff reporters Tian Lin and Huo Kan

(Beijing) – Local government financing platforms’ debts now total 9.3 trillion yuan, exceeding last year’s local government revenues by half, a China Banking Regulatory Commission (CBRC) official recently said at an internal meeting.

By the end of 2015, nearly 3.5 trillion yuan of those debts will come due, exerting heavy pressure on local governments’ fiscal conditions, he said.Financing platforms have more relied on bank loans since many of their alternative financing channels were restricted by regulations. But that means the risk of platform loans is further concentrated into banks.

The central government has been trying since 2009 to rein in the growth of platform loans, which economists view as a big threat to the health of the banking industry and the overall economy.

The CBRC alone has repeatedly required banks to cap and reduce their lending to platforms, yet some of its recent steps indicate that it may be treating financing platforms with greater leniency.

The challenge for the banking regulator is to strike a balance between maintaining the stability of the banking system and not starving local governments of credit, an executive at China Development Bank (CDB) said.

Said a banker familiar with financing platforms: “Loosening banking regulations will hurt banks, while tightening up platform loans will hurt governments.”

This year, only a few nationally important financing platforms have received new bank loans, several bankers familiar with platform loans said.

Whether existing loans can be repaid remains an open question, and each government and each bank has to deal with its own set of problems, a bank executive said.

A revised policy, published by CBRC in April, required banks to report before the end of May detailed plans regarding how their debtor platform will repay their loans. The plans must include the date and amount of loans to be paid back and specify how the money used for repayment would be generated.

This has left financing platforms to determine the amount of payment themselves, the bank executive said. Some platforms had taken advantage of the regulation and reduced their debt service liability from 10 percent of the loan every six months to 2 percent, he said.

“This is the only option,” he said. “Some county-level platforms have problem repaying debts. Without modifying the repayment schedule, they would not have any money” to keep up with debt servicing.

The policy also seemed less demanding regarding controlling the amount of platform loans, compared with the draft released one month ago for feedback from local banks and financial regulators.

It lacked a statement included in earlier drafts that said: “Loans to financing platforms tied to county-level governments and those with high debt-to-asset ratios should be reduced.”

Also, the draft had said: “Loans to platforms with a debt-to-asset ratio of higher than 80 percent must not increase.” But the revision says: “The share of loans to platforms with a cash flow coverage ratio of less than 100 percent or a debt-to-asset ratio of higher than 80 percent must not increase from last year’s level, and they should be gradually reduced.

The policy also required banks to review again the risk of loans to companies previously treated as financing platforms.

Many of those companies are still functioning as local government financing vehicles, the bank executive said. No longer calling them platforms and treating them like corporate borrowers is merely a “self-deceiving tactic used so everyone could turn a blind eye and let them live,” he said.

Continued Borrowing

Several bankers said that it is only a matter of time before the CBRC and other central government regulators loosen their grip on financing platforms because newly installed government officials tend to launch new investments.

Local governments also need financing platforms to raise funds for urbanization projects, a lending officer at the CDB said, adding that the bank had been tracking government investments and paying attention to important projects.

Lending was restricted under current regulations, he said, but once regulations were relaxed, those projects would be the first to receive bank loans.

In fact, if it were not for regulatory restrictions, some banks would be more than willing to lend to financing platforms because the endorsement of a government still carried more weight than a regular enterprise, a source from a platform in the eastern part of the country said.

A loan officer for a large bank said the banks had little choice because returns from lending to other sectors were low. “Governments are the primary engine of economic growth. Who else should banks cooperate with?”

Before the authorities started taking a hard look at financing platforms, the loan officer said, some banks executives went so far as suggesting helping local governments prepare their financing platforms’ balance sheets to meet bank lending requirements.

Those days have passed, but many platforms have still figured out ways to circumvent restrictions and continue borrowing. In the past, local governments often earmarked reserve land as their financing platforms’ assets, which could be used as collateral for bank loans. But a policy in place since December prohibited this practice.

Now if a platform wants a piece of land, it will need to buy it like other companies in the market.

But that did not prevent local governments from tweaking game rules in favor of financing platforms, a source at a platform in central China said.

For example, he said, a government can tailor the requirements and rules of a land auction so no firm can outbid the financing platforms it controlled. It can also fully return the acquisition payment to the platforms and reduce or eliminate their tax burden, he said.

Economists have blamed the mismatch between local governments’ incomes and their spending obligations for the difficulty in controlling platform loans. Incentives that encourage government officials to invest and bankers to lend have also played a role, they say.

Since 2010, the authorities have been rolling out measures to control platform loans, a bank executive said. Every policy had something new, but a lack of consistency often confused people and given rise to a feeling that they were clutching at straws, he said