The risk banks face on loans to local governments' financing vehicles is a matter of great concern, the mainland's central bank warned yesterday.
"We should not underestimate the risk of that kind of loans. However, we should not say that the risk has become very high," People's Bank of China governor Zhou Xiaochuan told reporters on the sidelines of the National People's Congress in Beijing.
Zhou said attention needed to be paid to the development of local governments' financing vehicles and their hidden risks.
Analysts had voiced concerns about the asset quality of loans to these financing vehicles, raising doubts about their ability to repay them.
Shang Fulin, the chairman of the China Banking Regulatory Commission, said last week that outstanding loans to government financing vehicles amounted to 9.3 trillion yuan (HK$11.6 trillion) but growth in such loans was under control.
Zhou said the bulk of these loans were for the development of public facilities that would be able to generate income to repay them. Only about 20 per cent needed to be paid out of local governments' budgets, he added.
"If banks can understand details of the loans well and do appropriate analyses, the problem of default may not occur," he said.
Pan Gongsheng, a deputy governor of the central bank, said the asset quality of mainland banks was relatively good, with non-performing loans standing at 500 billion yuan and a bad-loan ratio of 0.95 per cent. "Both are at very low levels," he said.
Although profit growth at mainland banks slowed last year, operating indicators such as return on equity, capital adequacy ratio and bad-loan ratio indicated good performance, Pan said.
The State Council announced a plan on Sunday to scrap the debt-laden Ministry of Railways in an effort to streamline the government, while a new China Railway Corporation would be set up to operate the national railways.
Liu Shiyu, also a deputy governor of the central bank, said existing loan policies to support the ministry and the credit status of the bonds issued by it would remain unchanged.