Chinese banks are rolling over local governments’ debts30 August, 2012, 15:11. Posted by Zarathustra
Chinese banks are selectively rolling over debts owed by local government financing vehicles (LGFVs), provided that these LGFVs have sustainable cash flow and good collateral, according to First Financial Daily.
According to the report, one source from Industrial and Commercial Bank (ICBC) said that the bank is effectively rolling over and restructuring some of the debts owed by LGFVs so long as the value of the collateral remains above the loan value and that the project is 60% or more completed. Meanwhile, Bank of Shanghai said they have been rolling over LGFVs debts, and in some cases extending more credits, if the LGFVs in question have sustainable cash flow.
One Shanghai’s LGFV, Shanghai Chengtou, for instance, has recently obtained a RMB20 billion credit line with Bank of Shanghai. Incidentally, this very LGFV bears the same name of another Shanghai’s LGFV which was reportedly asking banks to roll-over its debts last year, as we noted here (although last year, they emphatically denied that they have requested any roll-over or attempted default, whatever).
However, the report suggests that as the China Banking Regulatory Commission (CBRC) ordered banks to manage credit risks of LGFVs, banks are only helping LGFVs which have good financial condition (such as what we mentioned above). Meanwhile, LGFVs are turning to the bond market and trusts companies for financing as banks are not as willing as they were to lend. Sources cited in First Financial Daily even said that trusts are currently the biggest source of financing for some LGFVs in Tianjin in others. But as we said, trusts companies are part of the shadow banking system, and these trusts products may turn out to be financed indirectly by banks, sometimes possibly off-balance sheet. As local governments are currently pushing out a lot of massive plans for investment projects to stabilise economic growth, funding requirement will probably increase in the near-future. We believe that as long as the central government is willing to let all these projects to go ahead, banks will remain to be the key for funding of these projects. At the present moment, however, some believe that the massive funding requirement from new projects and repayment of previous loans may force some local governments into borrowing from trusts.
The fact that banks might be rolling over debts is not new. Early this year, Financial Times already reported that Chinese banks were asked to roll over debts owed by LGFVs. In other words, some of these LGFVs which are unable to repay principles of their loans are having their loans maturities extended so that these loans are not immediately being classified as non-performing loans. The fact that some presumably bad debts are being rolled over instead of being classified as bad debts contributed to the low non-performing loans ratios at major banks that have announced results, in our view. As we believe that ultimately many of the LGFVs will be unable to service their debts no matter what, rolling over debts merely delay the problems of massive non-performing loans from becoming official.