Beijing's decision to allow local governments to defer repayment of bank loans - to avoid the loans being declared non-performing - is widely expected to backfire.
That's because it creates more room for bureaucratic interference and malfeasance.
As debt-ridden local government financing vehicles (LGFVs) - companies established to borrow on behalf of local governments, which cannot borrow on their own - begin applying for the one-off extensions to loans they used to fund infrastructure projects, bankers are increasingly concerned about rising long-term risks.
About 70 per cent of the infrastructure projects funded by such loans are unlikely to generate enough income to repay the debts in full, according to the China Banking Association.
The China Banking Regulatory Commission has allowed some LGFVs to defer repayments if they meet collateral requirements. The move is part of Beijing's efforts to curb growth in bad debts, given that the debt liabilities of local governments total a staggering 10.7 trillion yuan (HK$13 trillion). According to the National Audit Office, the amount of loans extended to LGFVs stands at more than 2.6 trillion yuan.
Non-performing loans can cause banks losses that reduce their equity and make them less solvent.
Beijing has been trying to resolve this financial mess since last year. However, the cash-flow problems of the LGFVs seem to be more serious than they appeared. As a result, LGFVs are desperately seeking to restructure their debts.
