CBRC takes harder line on local debt

The China Banking Regulatory Commission (CBRC) is calling on banks to get stricter when lending to local government financing vehicles (LGFV), according to reports Thursday in the Shanghai Securities News, citing guidelines from an industry circular recently issued by the commission.

Specifically, the CBRC's latest directives recommend banks keep their 2013 LGFV loan quotas even with the previous year, while also keeping the overall balance of loans to LGFV under 2011's year-end total of 9.1 trillion yuan ($1.46 trillion), according to details provided by local media. Banks should ensure as well that loans to LGFV do not account for a larger percentage of their total yuan-denominated lending than they did at the end of 2012.

The commission also told banks to pay special attention to LGFV with high debt ratios. For instances, banks will not be allowed to extend credit to vehicles with debt-to-asset ratios over 80 percent.

The CBRC guidelines touched on financial products being issued by LGFV as well, including bonds, trusts and wealth management products. The commission asked banks to think twice about buying debt securities from LGFV and banned them from acting as guarantors of such products.

Tightening restrictions on bank loans in recent years have made LGFV increasingly reliant on selling bonds to financial institutions, compounding the risks facing the country's banking system as a result, according to Shang Fulin, chairman of the CBRC.

The tougher rules coming from the CBRC may be effective at diffusing the risks LGFV pose to China's commercial banks, Yu Fenghui, a senior official from Agricultural Bank of China who had reviewed the guidelines in full, told the Global Times.

Yu noted however, that these new guidelines alone would not be enough to control local government debts. China's local governments saw their debts stack up to 10.7 trillion yuan at the end of 2010, according to data from the National Bureau of Statistics. Despite measures introduced to dampen borrowing, local government debts had ballooned to 11.7 trillion yuan by the end of 2012, according to figures offered by Yu.