China has the world’s second biggest economy and analysts have warned that debt which is affecting the Chinese banking system is a major worry. This is after Chinese state media and government officials have stated that they have started to see positive results from dealing with the local government debt.
Take pressure of banks
It was reported in the China Securities Journal that the Chinese regulators have been reclassifying the debt to reduce the pressure on banks’ provisioning requirements for potential bad loans.
In June China’s state auditor attempted to put a halt to any fears over the condition of the country’s banking system by laying the groundwork for a debt clean-up. To back this up the Ministry of Finance in China stated that local government debt risks are all under control, this has come about since Beijing has had some success in dealing with the debt.
It was revealed that local governments up till the end of 2010 had borrowed 10.7 trillion Yuan. A source who provided information to the China Securities Journal told the paper that approximately a third of the loans which local government financing vehicles were granted were deemed low-risk and would therefore be booked as corporate loans. The change will take some of the pressure off the banks and give them a chance to raise necessary capital.
Chinese banking regulator is very tough
Senior analyst at First Capital Securities, Wang Haoyo said: “China’s banking regulator is very tough as well. Banks were told not to extend existing credit or grant new loans to LGFVs that have no sufficient cash flows.”
It was revealed that after regulators have gone through many rounds of clean-up, the exposure the banks are carrying from local government financing vehicles have been much reduced.
Chinese Securities Journal had revealed that Beijing was encouraging banks to fix the contracts, raise the collateral demands and other steps to ease the debt exposure.