Going into last Friday it sounded as though China’s National People’s Congress would be pretty benign, with few major restrictions on lending announced.But this sounds significant, and it suggests, perhaps that the country’s central leaderhip is concerned about the deteriorating financial health of its local governments.
China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.
The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.
Professor Patrick Chovanec discusses what this meanins:
So why are Chinese authorities announcing this move now, and what does it all mean? On one level, it’s part of a series of signals over the past few weeks designed to tamp down runaway lending. Last spring, in the midst of China’s huge lending boom, the China Banking Regulatory Commission (CBRC) was reassuring sceptics there was no reason to fear an explosion of bad debt because most loans were going into government-sponsored infrastructure projects and would almost certainly be repaid. A year later, they’re a lot more worried, and are sending a strong message to lenders that such loans should not be considered risk free. Even with the guarantees in place, Bloomberg reports that “a few cities and counties may face very large repayment pressure in coming years because of debt ratios [outstanding debt compared to annual revenue] already exceeding 400 per cent.” By striking the fear of God into lenders, regulators hope to get them to turn off the tap.
Whether regulators will really leave banks holding the bag for the loans that have already been made is another matter. The government has no interest in undermining the balance sheets of the big banks, which it would be forced to bail out in any event. But I found the Bloomberg article’s allusion the 1998 collapse of Guangdong International Trust & Investment Corp. (GITIC) potentially prophetic. Besides the “big four” banks, China has literally hundreds of smaller lending institutions, from municipal banks to trust companies to rural credit co-ops. I wouldn’t be surprised if many of these institutions, with their close ties to local governments, own a big piece of the loans being called into question. It’s too early to say, but if GITIC offers any precedent, we could see a handful of less-favoured institutions cut loose and allowed to implode. Depositors, creditors, and investors might be well advised to start asking, who is the next GITIC?