A few days ago we highlighted here at The Money Game how loans to Chinese local governments were a point of concern for China’s financial system. Year to date as of June, $1.14 trillion of new loans to local governments have been created and even regulators admit that 20% are of questionable standards.
Today, the China Banking Regulatory Commission (CBRC) is trying to play down the figure. It’s huge, but manageable:
“These questionable loans won’t necessarily turn sour, as most of them have eligible collateral or a secondary source of repayment,” a CBRC spokeswoman told China Daily on Tuesday.
The regulator said in a statement that it would conduct on-site inspections over the next three months and urge banks to make adequate provisions to prevent possible increases in bad loans.
Qiu Zhicheng, a banking analyst at Guosen Securities, feels that the economic growth over the next few years will determine the fate of the bad loans.
“In boom times, it is unlikely that these loans will turn bad, as local governments would have adequate funds to repay the loans due to ample gains from land sales. But it is hard to imagine the quality of these banking assets if economic growth slows down,” he said.
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