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China Banking Regulator Warns over Default Risks

01-30 13:39 Caijing
Total loan balances held by China's financing institutions are around 67 trillion yuan, said Shang Fulin.

Chinese banking industry, with assets of more than 130 trillion yuan, is facing risks of a default as outstanding loans build up, Chairman of the China Banking Regulatory Commission warned, according to the 21st Century Business Herald, citing his remarks at an annual working meeting concluded in mid January.

Total loan balances held by China's financing institutions are around 67 trillion yuan, with half made to local governments through financing vehicles, and to property, business clusters as well as industries with overcapacity, Mr. Shang reportedly said.

Characterized as "highly concentrated" and "broadly impacted", the loans need to be "heavily fortified" and require "classified polices", he said.

Bank stocks bore pressures on Wednesday, with the Huaxia Bank dropping over 3 percent, and Ping An Bank and the Bank of Ningbo felling more than 3 percent.

Mounting debts

According to data published by the National Audit Office, the banking sector was exposed to about 10.7 trillion yuan in local government debt in early 2011. Combined with 7.2 trillion yuan of government bonds in the central budget ending 2011, the headline government debt has mounted to roughly 18 trillion, accounting for 38 percent of GDP that year.

Corporate borrowing has been also on the rise led by the nation's massive spending plan to stimulate growth. Data compiled by Bloomberg show that total short- and long-term borrowing by 3,895 publicly traded non-financial companies climbed to almost 1.7 trillion U.S. dollars in their latest filings, from 604 billion at the end of 2007.

Given China's flexibility to reduce debt, in particular the debt-to-government spending ratio, China's debt remains a big concern, said ANZ. The situation is even more acute when factoring into all kinds of hidden debts, it warned.

Government debt rollover

Local governments had total outstanding loans of 9.2 trillion yuan as at the end of 2012, data from the CBRC showed. The figure was 9.1 trillion yuan at the end of 2010.

Calculations based on the data by the Financial Times showed Chinese banks had rolled over an estimated 3 trillion yuan, or even more, of 4 trillion yuan in loans and interest that had fallen due for repayment by the end of last year.

"The implication of a stable outstanding loan volume is that the vast majority of local government loans that were to come due over the past two years have simply been extended. Accounting for interest payments of 6 percent a year, local governments have paid back a maximum of about 1 trillion yuan," the FT said.

The debt rollover has become a common practice, which should caution regulators with risks transferring to other financing sources such as trust funds and bonds, said Ken Peng, an economist at BNP Paribas SA.


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