China urged banks to continue funding local government projects under construction and refrain from calling in loans as the country works through an economic downturn.
Banks should not refuse funds to projects approved before the end of last year even if borrowing agencies are unable to meet payments, China’s State Council said last week, in a joint announcement with the Chinese Ministry of Finance, central bank and regulator.
The council also urged local governments to use fiscal support as short-term working capital for ongoing projects to prevent or reduce risk.
Photo: Bloomberg
The message raises contradictory signals from a government that is seeking to trim local debt to more manageable levels by recapitalizing banks, overhauling local finances and removing implicit guarantees for corporate borrowing that once helped struggling companies.
“The government is easing its reform on local debt as the leaders found this could affect not only economic recovery but also regional social stability,” Beijing Institute of Technology economics professor Hu Xingdou (胡星斗) said. “It also shows the economic slowdown is a serious problem, and that the government wants to spare no effort.”
China should continue streamlining administrative approvals and improve government services despite declining investment, Chinese Premier Li Keqiang (李克強) said last week on a government Web site.
In a bid to wean regional governments from borrowing off their balance sheets, policymakers in March announced a program that would convert as much as 1 trillion yuan (US$161.16 billion) of such debt into municipal notes this year.
Government data released on Wednesday last week showed that 707.9 billion yuan in new loans was issued last month, less than all 36 forecasts in a Bloomberg News survey. The M2 gauge of broad money rose by the least on record.
Standard & Poor’s said China might give banks more sweeteners to buy municipal bonds after the nation introduced incentives including letting them use the securities as collateral for loans.
Chinese regulators issued a paper with details of a previously announced debt-swap plan, that says local government bonds can be used as collateral for borrowing from the central bank, according to a copy of the document obtained by Bloomberg.
The notes can also be used as backing to get treasury and local government fiscal deposits.
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