China’s state-owned banks told to stop lending to local governments as debt crackdown intensifies

The central Chinese government has sent a blunt message intended to dissolve the marriage between banks and local governments, the nexus in China’s debt-fuelled growth model.

In a directive full of “must nots”and “shalls” posted on its website last week, China’s Ministry of Finance, under the newly appointed minister Liu Kun, told state-owned financial institutions not to provide any funding to local governments, with the exception of buying government bonds.

At the first meeting of the Central Economic and Financial Commission, the supreme economic decision making body headed by Xi Jinping on Monday, the Chinese president said local governments and state-owned enterprises must cut debt further.

China’s state-owned banks were told to check the registered capital of projects sponsored by local authorities, to appraise borrowers’ real repayment capabilities and not to accept local government’s guarantees for repayment or return, according to the ministry’s directive.

Banks “must not provide any form of funding directly to local governmental departments or directly via local state-owned enterprises and institutions” and “must not increase new loans to local government financing vehicles irregularly”, according to the notice.