Chinese banks see risks in 23% of $1.1-tn loans

Chinese banks may struggle to recoup about 23 per cent of the $1.1 trillion they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.

About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.

Commission Chairman Liu Mingkang said this week borrowing by the so-called local government financing vehicles may threaten the banking industry. The nation’s five-largest banks, including Agricultural Bank of China, plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year.

“In China now, it is the same as the people getting loans in Phoenix here in the US three years ago,” said Vikas Pershad, chief executive officer of Chicago-based Veda Investments. “People who want money get money, and then they all lose track of it.”

Highways, airports
Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.

“The issue is symptomatic of the way the stimulus package was rolled out in 2008,” said Nicholas Consonery, Asia specialist at the Eurasia Group. “It is difficult for local governments to finance these projects. It is written under the Chinese constitution that local governments cannot offer their own debt.”

Only 27 per cent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said.

Calls to the banking regulator’s press office in Beijing after business hours weren’t answered.