Chinese banks may write off nearly $253-bn in bad loans
27 Jul 2010
Chinese banks may find it difficult to recover about $253 billion or 23 per cent of the 7.7 trillion yuan ($1.1 trillion) they lent to local government financing vehicles for funding regional infrastructure projects, according to the latest data from China's banking regulator.
China Banking Regulatory Commission (CBRC) had asked China's commercial banks to do a self-assessment on the size of possible defaults and the banks have come back saying that 23 per cent of the 7.7 trillion yuan lent to local-government financing vehicles (LGFVs) may face the risk of default, Bloomberg reported over the weekend.
This massive potential default poses no problem for the communist China, as the banking regulator has told banks to write off non-performing project loans by the end of this year, said Bloomberg citing a person with knowledge of data collected by CBRC.
Since China's local governments are not allowed to borrow directly from banks, the local governments avail of financing for infrastructure projects by setting up LGFVs, and loans are often backed by the local government's real-estate assets and, sometimes, even guaranteed by the central government.
About half of all loans to LGFVs require backing from secondary sources including guarantors because the projects cannot generate sufficient revenue and only 27 per cent of the loans to LGFVs can be repaid in full by cash generated from the projects they have funded.
During the onset of the global recession, Beijing had asked its banks to lend to local governments for infrastructure projects and the property market in order to prop up the economy.
