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Financing vehicle seeks loan extension

A Shanghai government financing vehicle has asked for an extension on its bank loans, a fresh sign that easy credit in the past two years is beginning to take its toll.

Shanghai Rainbow Investment, which is responsible for financing and overseeing the construction of a transport hub in the city, has been unable to repay overdue short-term loans of several hundred million yuan, according to two bankers with knowledge of the matter.

The China Banking Regulatory Commission organised a work conference this week to address the issue, the bankers said.

Neither Rainbow nor the commission would comment.

Chen Qiwei, a spokesman for the Shanghai municipal government, said on Wednesday that all the city's local government financing vehicles (LGFVs) were operating normally.

Chen said 'restructuring' of the loans involving some of the vehicles was a normal procedure in line with Beijing's efforts to clean up the sector.

Banks granted 17.6 trillion yuan (HK$21.19 trillion) in loans in the past two years to combat the global financial crisis.

LGFVs were able to secure massive loans for infrastructure projects, but late last year Beijing recognised that the spending spree could lead to a bad-debt crisis that in turn could cripple the country's banking sector.

The national audit office found that local governments had total liabilities of 10.7 trillion yuan at the end of last year and that 80 per cent of the debts were owed to banks.

The problem at Rainbow follows on the heels of a government highway company in Yunnan province, which defaulted after informing banks in April of its inability to repay some of its 90 billion yuan in loans.

'Banks used to actively issue credit to the government's financing vehicles in the belief that the infrastructure projects were safe and lucrative,' Orient Securities analyst Jin Lin said. 'Now the local governments and the banking regulator will have to join hands to iron out the thorny issues.'

According to the bankers, Rainbow had taken out loans with maturities of less than one year to finance the building of the transport hub. According to banking rules, loans of less than a year can only be used to boost cash flow and not to invest in projects.

Rainbow sought new loans to repay the short-term debt but failed because of Beijing's tightened scrutiny.

Short-term loans rather than long-term construction loans helped LGFVs save interest costs as long as they managed to get new credit to repay the original loans.

Analysts said the 'restructuring' mentioned by the government spokesman referred to the conversion of short-term debt into longer-term loans so that companies such as Rainbow could be relieved from repayment pressure.

Cao Yuanzheng, a chief economist at Bank of China, said yesterday mainland banks had enough cash reserves to cover possible defaults and they could control risks by adjusting the structure of the loans.

10.7tr yuan

The total amount, in yuan, local governments owed banks at the end of last year

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