State units may default on loans of 4.7tr yuan
About one-third of mainland loans to local governments may face repayment problems, according to accounting firm Ernst & Young. The problems could affect loans totalling between 3 trillion yuan (HK$3.61 trillion) and 4.7 trillion yuan, it says.
Most analysts estimate the banking system has a loan exposure of 9 trillion to 10 trillion yuan to local governments, but the People's Bank of China indicated this could be as much as 14 trillion yuan.
Barred from borrowing directly from banks, the governments set up so-called local government finance platforms (LGFP) that thrived following the outbreak of the global financial crisis in 2008. About 70 per cent of the state's 4 trillion yuan stimulus package was shouldered by local governments and state-owned enterprises, analysts said.
While the biggest risk to the credit quality of listed mainland banks is related to these finance vehicles, the bulk of the exposure was with unlisted banks that were smaller and regional, said Keith Pogson, Ernst &Young's managing partner of Asia-Pacific financial services.
However, Pogson said, 'the LGFP loans are not big enough to break China's banking system.'
'If the banks maintain their interest rate spread, then they would be able to digest the loans through their profits,' he said. The real risk lay in finding a balance between tempering inflation and maintaining the economic boom.
The average non-performing loan ratio of the nation's 17 listed banks stood at 1.14 per cent last year, but most analysts expect credit quality to worsen.
'The next two years represent the peak repayment period. The risk could mount if the economy experiences a marked downturn or if there is a significant decrease in land transfer income,' BOC International said.
Mainland banks raised about 782.8 billion yuan last year.
