China Daily: “China will boost the clean-up of thousands of millions of local government’s debt in 2012, so to guard against possible defaults that would hurt its banks, the country’s bankingregulator said Thursday.
The country will focus on cleaning up old loans made to local government financing vehicles(LGFV) while tightening new debt issues and raising cash to debt coverage ratios, China Banking Regulatory Commission (CBRC) said on its website.
The CBRC will strictly control the use of LGFV loans, while giving priority to key projects that are under construction, it said. The regulator will also improve risk monitoring and reclassify LGFV loans to relieve pressure from banks.
Local government debts had risen to 10.72 trillion yuan (1.7 trillion US dollars) by the end of 2010, accounting for about 26.9 percent of China’s gross domestic product, according to data released by the National Audit Office.
Analysts fret that if a certain proportion of the loans have gone sour, it will push up non-performing loan ratios in the banking industry and threaten banks’ credit ratings.
Local governments typically invested the money they borrowed in building infrastructure. They also faced huge repayment pressure in 2011 and now also in 2012.”
http://www.chinadaily.com.cn/china/2012-03/02/content_14735361.htm
China is taking steps to rein in the extraordinary splurge it generated in the aftermath of the 2008-09 financial crisis by encouraging local government initiatives. It is primarily this LG debt that has caused China’s debt to GDP ratio to increase from less than 20% to over 40 % in two years.
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