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  • mbablitz mbablitz Apr 15, 2013 10:01 AM Flag

    China's banking regulator tries to rein in risky loans

    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.

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