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Worldwide China to Nullify Loan Guarantees by Local
Regions Governments (Update2)
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By Bloomberg News
Energy
Finance March 8 (Bloomberg) -- China plans to
Health Care nullify all guarantees local governments
Insurance have provided for loans taken by their
Real Estate financing vehicles as concerns about credit
Technology risks on such debt increases.
Transportation
The Ministry of Finance will also ban all
Economy
future guarantees by local governments
Politics
and legislatures in rules that may be issued
Law
as early as this month, Yan Qingmin,
Environment
head of the banking regulator’s Shanghai
Science
branch, said in an interview. The ministry held meetings on the rules on Feb. 25
Opinion
with regulators including the China Banking Regulatory Commission and the
Spend
People’s Bank of China, Yan said March 5.
Sports
Arts and Culture China’s local governments are raising funds through investment vehicles to
Editors' Video Picks circumvent regulations that prevent them from borrowing directly. A crackdown
Bloomberg Markets on such loans, estimated at about 11.4 trillion yuan ($1.7 trillion) at the end of
Magazine 2009 by Northwestern University Professor Victor Shih, could trigger a “gigantic
Special Report wave” of bad debts as projects are left without funding, Shih said this month.

“By striking the fear of God into lenders, regulators hope to get them to turn off
RESOURCES the tap,” said Patrick Chovanec, a professor at Tsinghua University in Beijing.
Bloomberg TV “Banks have lent on the assumption that a lot of these infrastructure projects are
Bloomberg Radio risk-free, but many had no creditworthiness beside the guarantees.”
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The Hang Seng Finance Index, which tracks Hong Kong-traded shares of banks
Bloomberg Press
including Industrial & Commercial Bank of China Ltd., closed 2 percent
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higher today.

‘Big Risk’

Su Ning, a deputy governor at China’s central bank, said today that a “fairly high More News
proportion” of total lending last year went to the funding vehicles. Chinese banks
• Wells Fargo Card Executive Stung by
extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk”
Fraud, Finds Solution With Visa's Help
from local-government guarantees for money borrowed to fund infrastructure
projects that may not generate returns, he said at a press briefing in Beijing.
• IPO Market Rebounds on S&P 500
“China’s sending a very strong signal that this kind of financing is over,” said Rally as MaxLinear Offers Shares at
Chovanec, an associate professor in the School of Economics and Management at Premium
Tsinghua University. “It raises the specter that China’s banking system has a lot
more risk in it than people previously thought.” • Credit Suisse Group Plans to Hire 130
Central bank governor Zhou Xiaochuan said March 6 during the National People in Sales at Investment Bank
People’s Congress that while “many” local financing vehicles have the ability to
repay, two types cause concern.

Struggling With Debt

One uses land as collateral, while the other can’t fully repay borrowings, meaning Energy Business Europe
local governments may be liable, leading to “fiscal risks,” he said.
Global Energy Club - Contacts
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A few cities and counties may struggle with repayments in coming years because www.globalenergyclub.com
of debt ratios already exceeding 400 percent, a person with knowledge of the
matter said in January. The ratio is of year-end outstanding debt to annual Energy Tax Credits
disposable fiscal income. Is your company eligible for federal
energy tax credits? Ask us!
The financing vehicles of large coastal cities are well- funded as most have www.claytonmckervey.com
publicly traded subsidiaries that can raise capital from the markets and rely less
on bank loans. Entities in northern and western China are of particular concern, thorium energy
the banking regulator’s Yan said while attending annual parliamentary meetings. thorium energy news and information
IThEO campaigns for thorium energy
The 1998 collapse of Guangdong International Trust & Investment Corp., which www.IThEO.org
borrowed domestically and overseas on behalf of southern China’s Guangdong
province, left creditors including Dresdner Bank AG of Germany and Bank One
Corp. in the U.S. with $3 billion of unpaid bonds. It marked the first time that
Chinese authorities failed to bail out one of the nation’s state-owned trusts.

Halting Credit

Commercial banks have been told to assess the size of such lending and stop
providing further credit if they find problems, Yan said.

http://www.bloomberg.com/apps/news?pid=20601208&sid=ay..a15ZCHJU 23/03/2010
China to Nullify Loan Guarantees by Local Governments (Update2) - Bloomberg.com Page 2 of 3

Bank of China Ltd. President Li Lihui said in an interview last week that the
nation’s third-largest lender has reviewed loans to local governments and
identified some financing vehicles that didn’t have adequate liquidity to make
payment. The bank plans to exit projects without proper collateral and reduce
new advances to local governments this year, Li said.

ICBC Chairman Jiang Jianqing said the lender found some risks in such
borrowing arms. Those situations aren’t yet widespread, Jiang said. The bank
inspected its loans extended to local government financing vehicles in 2008 and
2009 and “so far didn’t find many big problems,” ICBC President Yang Kaisheng
said yesterday.

‘Red Herring’

Jonathan Anderson, an economist at UBS AG, said March 5 he saw a “classic

red herring” in arguments that “enormous, hidden off-balance-sheet liabilities”
among China’s local governments could precipitate a debt crisis.

The use of local-government financing vehicles is a “micro-level” issue, not one

that affects judgments on the strength of a Chinese economy which is “nowhere
near to a crisis or implosion,” Anderson said.

Northwestern’s Shih estimated that borrowing by China’s 8,000 local-government

entities may have totaled 11.429 trillion yuan in outstanding debt by the end of
last year and they had credit lines with banks for an additional 12.767 trillion
yuan. That may result in bad loans of up to 3 trillion yuan even if the government
cracks down on funding, he said.

China’s banks had 497 billion yuan of non-performing loans as of Dec. 31,
accounting for 1.58 percent the nation’s total advances, according to the banking
regulator.

--Luo Jun, Kevin Hamlin. With assistance from Li Yanping, Zhang Dingmin in
Beijing. Editors: John Liu, Paul Panckhurst.

To contact Bloomberg News staff of this story: Luo Jun in Shanghai at +8621-
6104-7021 or jluo6@bloomberg.net

Last Updated: March 8, 2010 05:25 EST

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