Many urban commercial banks on the mainland are in "danger of bankruptcy" as they become the biggest victims of a mounting local government debt problem, with local authorities struggling to repay debts estimated to total 20 trillion yuan (HK$25.5 trillion), Haitong International Securities chief economist Hu Yifan said.
Hu told a Foreign Correspondents' Club lunch yesterday that these banks, controlled by governments, were "the most dangerous part" of the mainland's banking system because they were most at risk in the event of local government debt defaults. There were 144 such banks on the mainland last year.
"Those banks usually have a high incentive to lend to the property market," she said. "On the management level, they are not as good as the Big Five. In the coming two to three years, mergers and acquisitions of such banks will be a big trend."
Local government debt, borrowed from the banks and poured in large part into thin-margin infrastructure projects, accounts for up to 40 per cent of the mainland's gross domestic product, Hu estimates.
That is higher than the International Monetary Fund's estimate of about 26 per cent, but still lower than the "less than 60 per cent" level, above which a nation is deemed financially unhealthy.
"China now has about 50 cities constructing railways and 18 airports under construction," Hu said, adding that the money borrowed to build them was "highly unlikely to be collected".
To help local governments deleverage, the banking regulator could allow asset management firms to buy stakes in urban commercial banks, she said.
Meanwhile, a property tax would be a "golden bullet" to help the deleveraging process, Hu said.
The central government could allow the Guangzhou, Shenzhen and Hangzhou city governments to introduce trial property taxes early next year and then expand the programme to more cities to boost local government revenue, she said.
In the longer term, Beijing would allow local authorities to issue bonds directly, without the need for approval from the central government, Hu said. Currently, local governments have to get Beijing's nod before issuing debt, or alternatively, they can issue "local government facility bonds" in the interbank market.