A lot of people have asked me to write about the recently "leaked" CBRC report on dodgy local government debt. Here is what the article in Monday's Bloomberg had to say about it (and note especially that delicious second paragraph):
Mainland banks may struggle to recoup about 23 per cent of the 7.7 trillion yuan (HK$8.81 trillion) they have loaned 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 cannot generate sufficient revenue, said the person, who declined to be identified as 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 last week that borrowing by the local government financing vehicles may threaten the banking industry. The mainland's five largest banks, including Agricultural Bank of China, plan to raise as much as US$53.5 billion to replenish capital after the sector extended a record US$1.4 trillion in credit last year.
Many analysts seemed to have been surprised by the report, and over the past few days we've seen a veritable flurry of "half-full' interpretations of the numbers, but I would suggest, based on my pretty extensive experience in emerging markets, that we should assume the real problem is worse than the initial evaluation. It almost always is.
Not everyone agrees. In an article in today's People's Daily, the CBRC was at pains to play down the risks:
The China Banking Regulatory Commission (CBRC) said on Tuesday that nearly one-fifth of the bank loans disbursed to local governments are questionable, but will not cause any systemic risks to the banking sector.
…."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.
Maybe. I agree that these loans won't pose a risk to the banking system, but that doesn't mean that there won't be huge losses. It just means that the losses will be covered by the household sector. For years I have been arguing that without liberalizing interest rates and pushing through governance reform, there won't be meaningful reform in the domestic financial system. …
