Chinese Banks Rollover $482bn in Loans to Stave Off Massive Government Defaults

By: EW News Desk Team   Date: 30 January 2013

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30 January 2013

Chinese banks have extended at least three-quarters of loans made to local governments at the height of the global economic crisis. According to data compiled by the Financial Times, the repayments – worth at least 3 trillion yuan ($482 billion) – were due at the end of last year and the rollover is aimed at averting a wave of defaults that could have dealt a harsh blow to the world’s second largest economy.

Local governments that borrowed heavily from banks to finance a 4 trillion yuan state-endorsed stimulus programme during the global economic slowdown are now struggling to generate revenues needed to pay them back, the Financial Times reported Tuesday.

Using data reported by local media, the FT said local governments had total outstanding loans of 9.2 trillion yuan as at the end of 2012, compared with 9.1 trillion yuan at the end of 2010. Between those two years, 41 percent of all local government debt had been scheduled to mature.

The FT explained:

The implication of a stable outstanding loan volume is that the vast majority of local government loans that were to come due over the past two years have simply been extended. Accounting for interest payments of 6 percent a year, local governments have paid back a maximum of about 1 trillion yuan.

The FT, however, said its calculations are imprecise because China’s bank regulator only publishes figures for total outstanding loans to local governments and does not announce details about interest payments or refinancing arrangements.

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Last year, credit ratings agency Standard & Poor’s said the practice of debt rollovers, while common, undermines investor confidence in the banking sector and casts a shadow of doubt over China’s economic fundamentals and growth prospects.

The agency added that Chinese lenders permitting loan extensions to avoid defaults is a “backward step” that threatens the stability and transparency of the banking system. Without appropriate support from the central government, S&P expects 30 percent of all loans to local governments to sour in the next two years.

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Official public debt in China is relatively low at 20 percent of GDP, but Huang Yiping, an economist at Barclays, said Beijing might eventually have to absorb all local government debt – about 25 percent of GDP – since it had directed them to spend the money in the first place. “Rollovers were really the only option available to the government and to the banks. What can you do when three-year bank loans mature while the highway is still being built?”

Huang added:

The ultimate responsibility will rest with the central government.


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