Chinese Banks Ordered To Extend $1.7 Trillion In Loans To Local Governments
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The Chinese government has orders its banks to extend the maturity dates for loans made by provincial and city authorities, said the Financial Times on Sunday, after local governments were saddled with more than $1.7 trillion in debt from new projects during the global financial crisis.
The Chinese government has orders its banks to extend the maturity dates for loans made by provincial and city authorities, said the Financial Times on Sunday, after local governments were saddled with more than $1.7 trillion in debt from new projects during the global financial crisis.
“An appropriate maturity extension is in the banks’ interest,” said Fan Jianping, the chief economist for China’s State Information Centre, a think-tank within the government’s planning agency.
According to FT, the central Chinese government had encouraged banks to lend more cash to local governments – both at the provincial and city level – during the peak of the global financial crisis, as the country was attempting to maintain its phenomenal upward economic growth trajectory.
But that left the local governments with more than $1.7 trillion in debt, said the newspaper, with more than half of the loans scheduled to be due over the next three years.
Consequently, numerous Chinese banks have already begun extending the maturity debt for a number of the loans, with the central Chinese government hoping that the action will avoid a huge wave of defaults. According to an FT source, the maturities would be extended by as much as four years.
Still, some analysts warned that the majority of the loans would go on being unpaid, despite the time extension, with the Chinese problem being one of less of quantity but of structure.
“The problem is rooted in the national fiscal system,” said Huang Haizhou, chief strategist at China International Capital Corp, the country’s leading investment bank.
[quote]Huang though was optimistic that “if a successful fiscal reform is implemented over the next three to five years by the new government, the problem will only be a temporary shock.”[/quote]Related: With Her Debt in Tow, Where is China Heading? : Michael Pettis
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During a meeting with business executives in Beijing last week, China’s Premier Wen Jiabao stressed the need for the nation to begin taking pre-emptive measures and start “fine-tuning” economic policies, so as to ensure the continued growth of the economy.
“We have to make a proper judgment as early as possible when things happen and take quick action,” added Wen, who had been at the meeting to seek for opinions on a government report.
