China is considering allowing banks to roll over loans to local governments, giving them more time to repay massive debts from stimulus spending for the 2008 financial crisis, state media said yesterday.
Local governments cannot borrow directly from banks, but in recent years they have set up financing vehicles to fund infrastructure and other projects, fueling concerns about a potential explosion in bad loans.
The China Daily said the banking regulator was mulling “long-term” extensions of loans to local governments, and that a concrete policy could emerge as early as this month.
The China Banking Regulatory Commission could not be reached for comment yesterday, but the Financial Times reported on Monday that the government had already ordered banks to roll over the loans to avoid defaults.
Last year, China’s National Audit Office put the debt held by local governments at 10.7 trillion yuan (US$1.7 trillion) at the end of 2010 — or about 27 percent of China’s 2010 GDP.
Nearly half, or 4.46 trillion yuan, is scheduled for repayment this year, the China Daily said.
According to a separate report, China’s banks had more than 9 trillion yuan of outstanding loans issued to local governments as of September last year, the Shanghai Securities News said yesterday.
Analysts said China had previously rolled over such loans, but that the huge amount of money involved this time around was unsettling investors.
“Of course the loans are and will be rolled over,” Hong Kong-based UBS economist Wang Tao (王濤) said.
“What is new and uncomfortable for investors is perhaps the size of new local debt accumulated during the last round of economic stimulus,” she said in a research report yesterday.
The risk was some local governments used bank lending to finance nonviable projects, which could eventually produce bad loans, Wang said.