Banks watchdog may put off reckoning on local debt

PUBLISHED : Friday, 13 January, 2012, 12:00am
UPDATED : Friday, 13 January, 2012, 12:00am


The mainland's banking watchdog is likely to let lenders postpone a mandatory recognition of losses from local government debt, undermining investors' confidence, ratings agency Standard & Poor's said yesterday.

'The long-term damage to investor confidence could be costly,' said Ryan Tsang, S&P's Asia-Pacific credit analyst. 'Investors at home and abroad will eventually demand higher risk premiums on banks' debt.'

For the past two years, the China Banking Regulatory Commission (CBRC) has been taking measures to contain the high risks associated with lending to local government financing vehicles (LGFVs), companies set up to borrow from banks on behalf of local governments, who face restrictions in borrowing money directly.

But ever since reports late last year that several heavily leveraged LGFVs planned to defer their loan repayments, there have been signs that the regulator might be ready to loosen its grip to help banks try to avoid massive defaults.

Extending debt maturities could undermine a decade of increasing transparency in the mainland banking system, the ratings agency said.

'If this does happen, it could be a step back for the CBRC,' said Tsang, adding that it would not, however, mean a fundamental change in the regulator's stance.

The key issue, Tsang said, is how the regulator plans to deal with the root of the mainland's local-government-debt problem.

In the short term, extending debt maturities to facilitate payment could buy more time for the beleaguered banking sector, reducing investment volatility and avoiding a surge in non-performing loans, said Liao Qiang, director of financial institutions ratings at S&P.

Without government support, about 30 per cent of loans to local-government companies could turn sour in the next three years, says S&P.

It estimates that about 3 trillion yuan (HK$3.7 trillion) worth of LGFV loans could be eligible for an extension, if the CBRC goes ahead with the move.

This could reduce credit losses by 80 to 100 billion yuan for each of the next three years.

In a way, the government is trying to use inflation to solve part of the debt problem, said Sheng Nan, a senior analyst at CCB international, as '10 trillion [yuan] in a decade isn't really what 10 trillion is worth today'.

In October, CBRC vice-chairman Zhou Mubing indicated that the regulator may allow banks to reschedule loans so that LGFVs can match their expected operating cash flows with their loan repayment schedules.

The possibility of the extension was floated around the time when the banking regulatory body brought in a new head, Shang Fulin.

Fulin has a reputation for being pragmatic, but has also come under fire from investors for the scandals in the mainland stock market during his tenure as head of the China Securities Regulatory Commission.