Chongqing economic model ‘unsustainable’

Chongqing's investment-driven growth model involving large debt borrowing has accumulated considerable default risks in its financial system, which can turn into a crisis during the current economic downturn, an economist said yesterday.

"China Development Bank's Chongqing branch has recorded a low non-performing loan (NPL) ratio over the past seven years, because the local economy has been growing, and there was new growth to sustain interest payments," Tian Yun, an economist at China Society of Macroeconomics under the National Development and Reform Commission, told the Global Times.

As of the end of March, the Chongqing branch of China Development Bank, one of the country's largest policy banks, had outstanding loans of 122.9 billion yuan ($19.5 billion), and its NPL ratio stood at 0.1 percent, lower than 1 percent for the seventh straight year, Guo Dong, president of the branch, told people.com.cn Thursday.

Bad loans may rise as the economy continues to slow down, and signs can already be found on a national level in commercial banks' first-quarter financial results, Tian said.

Commercial banks such as China Minsheng Banking Corp and Shanghai Pudong Development Bank all reported higher NPL ratios in the first quarter from the end of 2011.

Meanwhile, the commercial banks set aside an additional 246.1 billion yuan in total for bad loans last year, taking the total loan loss provision in 2011 to 1.2 trillion yuan, the China Banking Regulatory Commission said in its annual report in April.

The Chongqing model "doesn't extend the sustainability of China's growth model. The local cost of the surge in investment was spread out to the entire country through the banking system," Michael Pettis, a finance professor at Peking University, wrote in a newsletter in April.

Chongqing Land Group, owned by the municipal government, received a green light on April 23 to issue 5 billion yuan in corporate bonds for affordable housing construction, the biggest such issuance so far, Guangzhou-based Nanfang Daily reported.

However, for the Chinese banks, mostly State-owned, there is always a way out even if their default rates eventually rise, because the central government can help roll over the bad debts of local governments, and the failed projects can be recapitalized, Tian said.

Tian urged the opaque local government financing platforms to increase transparency and the government to make laws to regulate these risky financing methods, because "the worst that can happen to the banking system is to fail twice over the same issue."